The Walt Disney Co. (NYSE:DIS) is preparing to open a new theme park, its first in mainland China, in early 2016. The 20-square-kilometer (7.7-square-mile) Disney Shanghai Resort will include a pirate-themed Shanghai Disneyland, as well as many other attractions, such as a Broadway-style theater, a shopping district, and two hotels.
When park construction broke ground in 2011, the Chinese economy was still expanding rapidly with little headwind. Yet with recent uncertainty around the Chinese economy, with GDP growth slowing and the stock market there incredibly volatile, some might ask if Disney's new Chinese megaresort is in trouble. Here's why Disney doesn't worry about China's slowing economy and neither should investors.
Trouble in the Middle Kingdom?
As recent as Q2 2010, China was producing double-digit GDP growth by year-over-year figures. With around 7% growth expected in 2015, GDP growth is slowing as the economy matures and there's little reason to believe that those previous growth rates will return.
Then there's the Chinese stock market, which doubled from Q2 2014 to Q2 of this year. But over the last two months the market has been crashing as valuations have skyrocketed beyond reasonable means and the bottom of the market seems to be falling out. The Chinese government has been responding to the crash in unpredictable ways, such as on Aug. 10, when it suddenly allowed its controlled currency to depreciate 2% to the U.S. dollar, it's biggest single drop in about 20 years. The stock market there has already been unpredictable and this kind of ad hoc policymaking is only adding to these concerns.
But even with these economic headwinds, Disney still has an incredible opportunity in China thanks to rapid middle-class growth that surges ahead regardless of the stock market issues and slowing GDP growth.
326 million to enter the middle class
Regardless of China's economy growing at just 7% ("just" in relation to previous growth rates, though even half of that growth would be incredible for the U.S. or other advanced economies), there are still millions of citizens entering the middle class there each year. Research by ANZ economists estimates that 326 million Chinese citizens will rise into the middle class between 2014 and 2030. That's roughly the population of the United States entering the middle class in less than two decades.
Due to the sheer size of the population in China and how many families are moving into that middle class with new means to take vacations, theme parks in China have the opportunity for massive gains from a growing mass-market consumer base. A Bloomberg article cites estimates that 174 million Chinese tourists will spend $264 billion by 2019, up from 109 million who spent $164 billion in 2014.
Since Shanghai itself already draws around 40 million tourists a year, some analysts estimate as many as 25 million visitors to Disney in its first full year open, which would make it the most-attended theme park in the world, ahead of Disney's Magic Kingdom in Florida, and with potential for more large increases in the years to come.
As for the volatile Chinese stock market, this is also little concern for the mass middle class. A relatively small number of Chinese citizens are directly investing and at risk of major losses. GaveKal, a financial research group, reported that few mass-market, middle-class families are directly tied to the stock market: "The pain of the crash is affecting probably no more than 20 million to 30 million Chinese households, most of which range from upper middle class to very wealthy."
Disney still looks like a great long-term play
Shares of DIS dropped in early August after Disney reported better-than-expected revenue and record profits, but saw slowing growth in its media and networks segment. Credit Suisse was among the analyst groups that downgraded DIS based on the changing media landscape and the slowing of Disney's network segment, since it makes up half of Disney's total revenue.
But the theme-park segment is Disney's second-largest and one of its fastest-growing. With growth rates like it has experienced in most of its parks globally in recent years, as well as this new park in China that is preparing to be its most-attended, theme parks could be Disney's largest segment in the near future. They could also be profit drivers for many years to come as parks from Hong Kong to Anaheim are expanded and new parks like this one in Shanghai are built.
As for the worry that a slowing and volatile Chinese economy will significantly slow visitation to this new Shanghai Disney Resort, the risk seems to be overblown. With the massively expanding Chinese middle class and tourism market, this Shanghai Disney Resort is still likely to be one the biggest growth drivers in Disney's recent history and a reason for a continued long-term bullish outlook on Disney.