Is Disney Scrapping Hong Kong Park Expansion to Focus on Shanghai?

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 |  About: The Walt Disney Company (DIS)
by: Steve Birenberg, CFA

The Wall Street Journal is reporting that Disney (NYSE:DIS) is putting expansion of its Hong Kong theme park on hold and laying off the employees involved in developing the expansion plans.

The Hong Kong Park has been a disappointment almost from the day the gates opened. DIS owns it in partnership with the Hong Kong government so the shortfall hasn’t been material to DIS' financials. More of a lost opportunity.

My read on this news is that DIS wants to preserve cash for China and focus on its development of a theme park in Shanghai. I believe DIS feels that Hong Kong is not fixable, at least not with the possibility of a reasonable return on investment. At the same time, DIS probably believes they have learned their lesson in Hong Kong and won’t make the same mistakes twice (too small of a park at opening, not enough Chinese-centric attractions, poorly designed marketing plans).

Most importantly, DIS sees the opportunity in Shanghai as much larger and material both as a standalone operation and as a marketing tool for other opportunities in China including the Disney Channel and merchandising.

A few months ago there were reports that DIS and the Shanghai government had made substantial progress on their partnership. News surrounding Shanghai matters to DIS stock from a long-term perspective. News out of Hong Kong is a sideshow.

I remain on the sidelines in DIS because I think investors are still underestimating the cyclical risk at theme parks local TV stations, and ESPN auto advertising exposure. DIS rightly earned a premium to its peers based on its performance over the past five years but I think that premium is no longer warranted given the risks inherent in DIS' asset mix in a still uncertain economic environment.

Disclosure: No positions