Disney Is Set to Gain Big in China

Through local ventures, positive government relationships, and the Disney Shanghai Resort coming next year, Disney is positioning itself to win big in China.

Apr 24, 2014 at 7:00AM

Mickey In China
Disney is quickly gaining brand equity in the largest market in the world. Photo: Brand Channel

When the company broke ground on its Disney Resort Shanghai back in 2011, Disney (NYSE:DIS) CEO Bob Iger said that "Our Shanghai resort will be a world-class family vacation destination that combines classic Disney characters and storytelling with the uniqueness and beauty of China. Working with our Chinese partners, the Shanghai Disney Resort will be both authentically Disney and distinctly Chinese."

That dream is more alive today than ever, but Disney's growth in China far exceeds theme parks. Through deals with local studios, cooperation with the government, and of course its forthcoming Shanghai theme park, Disney is set to make big gains in the Chinese market for years to come. DreamWorks (NASDAQ:DWA), Time Warner (NYSE:TWX), Twenty-First Century Fox (NASDAQ:FOX), and Comcast (NASDAQ:CMCSA) are all hoping to gain in Asia as well, though each company will have a hard time competing with the infrastructure and investment that Disney has already made.

Chinese film growth could mean incredible future profits

China Vs N America Box Office Growth
Source: ChinaFilmBiz.com

The Chinese film and media industry is booming, both in terms of viewers and in terms of production. PricewaterhouseCoopers projects a value for the industry of $6.49 billion in 2017, more than double its $3.26 billion value in 2012. This is just the film and media industry, and is separate from the theme parks and other revenue-generating operations that Disney will be deploying in the country.  Looking at the market's growth in the last decade, it's easy to see why these analysts bullishly expect China to become the largest film and media market in the world in the next few years. It's also clear as to why companies like Disney, DreamWorks and Comcast are working so hard to get roots in the market.

 Projected B O China Vs N Am Thru
Source: ChinaFilmBiz.com

Winning with local ventures
Disney is seeking to make an investment in the Chinese film business by working more directly with local companies. The company has struck a multi-year deal with one of the premiere Chinese media companies, Shanghai Media Group, to begin producing content specifically for a Chinese audience. The partnership seeks to co-develop Disney-branded movies for Chinese consumers. The partnership links U.S. screenwriters with writers and directors in China to work together on film projects in the classic Disney style, though with "Chinese elements" in the hope that this will make the products appealing to Chinese families. Disney Studios president Alan Bergman said that "Disney's collaboration with [Shanghai Media Group] adds an exciting chapter of new stories for the next generation of global Disney fans."

The company is making other partner investments as well. Iron Man 3 from Disney's Marvel Studios was co-produced with Chinese studio DMG and was the best-performing Hollywood film in the China market last year at $120 million. Disney's partnership with BesTV helps the company to break into the pay-TV space as well. BesTV New Media president Tao Mingcheng said that "Coupled with Disney's long-standing commitment to digital innovation across multiple platforms, both companies share a common vision to provide an enhanced viewing experience for Chinese audiences and consumers, and explore new business models for digital distributors."

DreamWorks has also partnered with Shanghai Media Group and three other local entertainment companies to create Oriental Dreamworks, a joint venture that includes production studios and attractions in Shanghai. This has been called a "Chinese content company" in which Dreamworks Animation holds a 45% stake. The remaining 55% of the venture is split between the three influential Chinese partners. Oriental DreamWorks already has four feature projects in development that will include Kung Fu Panda 3, one other U.S.-Chinese co-produced animated feature, and two live-action Chinese-language projects.

Winning with the government
Working within China has its challenges, and one of the main one is governmental hurdles of censorship and regulatory barriers. The Chinese government limits the number of foreign films allowed in the country each year, and often requires edits before granting approval.

Disney Helps China With Animation

Disney partnered with the Chinese government to improve China's film industry, adding to a valuable business-government relationship. Photo: Disney

Disney has already made strong governmental connections by working directly with the Chinese government. The company has already established good relationships with the Chinese animation industry, as it partnered with the Ministry of Culture in China in 2012 to help improve the animation industry in the country.

Building the happiest place on Earth -- at least in the Chinese mainland
Disney is not new to the theme park business in China. Disneyland Hong Kong has been operating since 2005. Plans for expanded accommodations at this property that could serve more guests appeared as a highlight of the company's 2013 fourth quarter results in its parks and resorts segment. This segment grew 9% for the full year 2013 over 2012, ahead of the company's overall revenue growth of 7% during the same timeframe.

However, Hong Kong and mainland China can be very different. The Shanghai Disney Resort, the first Disney resort on the China mainland, is under development and is set to open in 2015. This theme park is highly anticipated for Chinese families that don't have such an easy time traveling to and from Hong Kong.

Shanghai Disneyworld Via Cnn
Photo: CNN

Disney is not the only one betting on more theme parks in China; DreamWorks and Comcast-owned Universal Studios are both breaking ground on film-themed amusement parks in China. Oriental DreamWorks has released plans for a $3.1 billion indoor park in Shanghai, while Universal Studios newest Universal theme park, it's third in Asia outside of Japan and Singapore, will break ground in late 2014. Theme park operations have been a lucrative segment for Comcast. The company made $270 million in total theme park income during the third quarter of 2013 alone, up 7% from the same quarter last year.

An idea of what Foxworld Malaysia may look like. Photo: Variety

Outside of China, other companies are trying their hand at Asian theme parks. Twenty-First Century Fox's first theme park is set to open in Malaysia attached to a casino resort in 2016.  Cartoon Network, a subsidiary of Time Warner, is expected to open its Amazone Water Park in Thailand later this year. The theme parks website tells soon to be visitors to get ready for "Cartoonival, the world's largest aqua playground with over 150 water attractions." These two companies have traditionally been focused on media, but are diversifying in an attempt to pull in more and varied revenue streams. They also hope to gain on the brands that they each own, including Fox's blockbuster movies and Time Warner's Cartoon Network.

Which is the best bet?
There is room for multiple companies to benefit from growth in China and Asia in general. Hundreds of millions of consumers will become regular movie viewers and theme park visitors in the coming few years.

While all of the companies mentioned seem to be making smart moves to gain in this market, Disney has proven to be one of the first movers and one of the most aggressive in assuring that its brand will win the hearts of Chinese consumers (just as it has in the United States for decades). Smart investors will keep an eye on this growing and quickly changing industry to see which companies will gain the most from this market.

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Bradley Seth McNew owns shares of Walt Disney. 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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