The second largest segment at Disney(NYSE:DIS), parks and resorts, is expecting strong tailwinds from its massive new project. In 2016, its sixth major theme park, Shanghai Disney Resort, will open its gates to visitors. The facility will include two themed hotels, along with a large retail, dining, and entertainment venue. And of course it will include Shanghai Disneyland, consisting of six themed lands -- Mickey Avenue, Fantasyland, Gardens of Imagination, Treasure Cove, Adventure Isle, and Tomorrowland.
This joint venture between Disney and three state-owned enterprises in Shanghai may be exactly what Disney needs to restore investor confidence, especially in light of subscriber losses at the media networks division.
Shanghai Disney Resort is not without its risks, however, as the competition among theme parks in China heats up. Only time will tell if this entertainment sanctuary is worth the $5.5 billion investment Disney poured into it.
Listen to the full podcast by clicking here. A full transcript follows the video.
This podcast was recorded on Dec. 1, 2015.
Sean O'Reilly: So you got these headwinds or tailwinds for the company going around their second largest segment, parks and resorts. So what's going on there?
Vincent Shen: OK, so this is one area where the company overall sees a lot of potential, and the more I read about this more I think, like, this is an amazing opportunity -- but it's not without its risks. So parks and resorts, like you mentioned, second largest segment. They make up about 31% of total revenue and 20% of operating income. And the thing is, the big ...
O'Reilly: It's expensive to run an amusement park.
Shen: The big project that's coming down the pipeline is Shanghai Disney. And so this is a huge, huge deal. The park covers 1,000 acres.
O'Reilly: Do you know what Orlando is?
Shen: It's very, very large. But there's more to that that I think is really interesting. So it's the first Disney park in mainland China. Of course there's one in Hong Kong and there's multiple faces to this production process. So there'll be, like, multiple parks, hotels, an entertainment complex, shopping, everything, the works. And they broke ground on this in 2011. It's costing them about $5.5 billion. A huge investment. I think it's the biggest single foreign investment in China ever, and Disney will actually only own a 43% stake, because there's going to be the remainder of that's owned by three state-owned enterprises.
O'Reilly: I hope they didn't put up all the money for 43%.
Shen: I think the state-owned enterprises also put up over $2 billion. And the thing is, one of the big numbers that I've seen thrown about is the idea that there are 330 million people who have enough disposable income to visit this park that live less than three hours away.
O'Reilly: Oh my gosh. That's the U.S. population.
Shen: So huge. And next to Shanghai, which is their wealthiest financial-center city, tons of opportunity there. And the big thing that I think kind of takes us to another step is they have reserved the land reserve that they need to expand with a few more parks for Disney itself. But this thousand acres that they have is only one-fifth of this huge 5,000-acre zone that Shanghai is setting aside. They're calling it the International Tourism and Resorts Zone.
O'Reilly: Oh, wow.
Shen: They want this to become like a playground, a huge focus for tourism, for them to draw out people. So Disney will just be one part of that. But I think it's a very strong bid in the company's favor that the country and the government is very committed to this area overall, because they have big plans. We're talking about a decades-long plan to develop this area into, like, a tourism attraction.
Shen: So you have all that in mind, huge numbers. 330 million potential visitors all within a very short travel distance, this is going to be the biggest park, has the tallest castle, the Magic Kingdom castle. Everybody is looking forward to this and I'm sure it'll be a big growth driver for the segment. But something else to keep in mind is that only 30% of theme parks in China either break even or profit. The rest lose money.
So this is not just a guaranteed slam-dunk. So even though there are nice projects in the pipeline, like this one, for the parks and resorts segment, nothing's guaranteed. I think that Disney is really, has a nice, wide moat around it based on the value of IP.
O'Reilly: They've got some really good IP, yeah.
Shen: So, but overall it's just something that people should definitely keep in mind for this one piece of the puzzle.