Here's How Media Giants Bet Big on China

Investors need to learn about the huge entertainment complex that DreamWorks Animation is building in China.

Victoria Zhang
Victoria Zhang
Apr 4, 2014 at 12:00PM
Consumer Goods

DreamWorks Animation (NASDAQ:DWA) -- one of Hollywood's most famous studios, with more than 25 animated feature films released -- has bet big on China. The company recently unveiled a design for a $2.4 billion entertainment complex in Shanghai, which would allow DreamWorks Animation to expand its growing ties with China. 

Observers could see this move as an attempt by DreamWorks Animation to catch up with The Walt Disney Company (NYSE:DIS) in the world's second-largest economy. Disney is constructing Shanghai Disney Resort, which will be the first Disney park in mainland China. Both investments are ambitious attempts to benefit from China's rising middle class, which is expected to continue growing together with China's overall economy. Several institutions, such as Standard Chartered Bank, have forecast that China will surpass the U.S. as the world's largest economy by 2020. Note that China already has a huge middle-class economy, so it seems like the perfect market for media giants.


Building the Dream Center
DreamWorks Animation has partnered with several local investors -- such as Shanghai Media Group, China Media Capital, and Hong Kong-based developer Lan Kwai Fong Group-- to build the Dream Center, a $2.4 billion project with live performance theaters and concert halls. According to MarketWatch, the project would open in 2017 or early 2018.

Jeffrey Katzenberg, DreamWorks Animation's CEO, believes this project will rank along with London's West End and NYC's Broadway district as one of the world's largest entertainment districts. The facility will hold the world's largest IMAX screen, hotels, restaurants, eight outdoor plazas, theaters, galleries, and several other attractions.

Exposure to China
This investment will likely help DreamWorks Animation benefit from China's rising middle class. In 2000, only 4% of China's urban households met the definition of middle class. By 2012, it had increased to over two-thirds. The best part is that by 2022, expectations call for China's middle class to number 630 million, or roughly 45% of its entire population.

The Dream Center will not just help DreamWorks get direct exposure to China, but it will also contribute to the company's revenue diversification efforts. It seems that the company -- which generated 62% of its total fourth-quarter revenue from films-- is well aware of the high risks involved with the movie business, and it is diversifying its revenue by investing in entertainment centers and entering into new businesses. To that end it recently founded a new publishing division called DreamWorks Press.

Note that DreamWorks Animation isn't unknown in China. "Kung Fu Panda," one of the company's most successful franchises, was a hit in China as it became the first animated film to make more than 100 million yuan in Chinese box offices. Therefore, there is a good chance that the Dream Center will see a positive reception when it opens.

Disney and China
Of course, DreamWorks Animation isn't the only player in the movies industry which has shown interest in gaining exposure to China's huge middle class. Expectations call for Disney to open its Shanghai Disney Resort in late 2015, roughly two years before the Dream Center opens. In the long run, both parks will have to compete against each other to win customers in Shanghai, China's largest city.

To benefit from China's strong appetite for luxury goods, Disney's new resort may include a hot spot for luxury goods. According to Luxury Launches, the 50,000 square-meter shopping center will have the name of Shanghai Village and it will feature a selection of high-end international and Asian retailers.

Parks and resorts are important revenue growth drivers for Disney. The company reported first fiscal-quarter results which showed that its operating income from parks and resorts increased 16% to $671 million due to record traffic at Tokyo Disney Resort, Walt Disney World, and Hong Kong Disneyland.

Foolish final thoughts
DreamWorks Animation's project to build a large entertainment park in Shanghai will help the company gain exposure to China's fast-growing middle class, and it will come as an important step in the company's revenue diversification process. With that said, the park will face serious competition from Shanghai Disney Resort, which is scheduled to open in late 2015.