Disney's China Move: A Big Growth Opportunity for Mickey

On November 4, 2009, Walt Disney Co. (DIS) said Chinese government officials had approved a plan to build a theme park in Shanghai.

I believe this is the beginning of a new and enormous growth opportunity for Disney. The cost of the park is estimated at $4 billion, which would rank among the biggest foreign investments in China to date. Disney already has a theme park in Hong Kong. Located on Lantau Island on the route to Hong Kong’s new airport, Hong Kong Disneyland is Disney’s smallest park. It got off to a rocky start after opening in September 2005, though changes have been made and attendance has improved. Now Disney will be able to take that experience from Hong Kong and apply it to a much larger theme park in Shanghai.

The plan is to locate the park in the Pudong district. right across the Huangpu River from the famous Bund section of Shanghai. Pudong is an area about the size of Singapore, which was rice fields until 1990 when the Chinese government launched a plan to develop Pudong into a world class business district. Today there is a deep water port, a new airport, a high speed train connecting Shanghai and the airport, an industrial park, a financial district and the Oriental Pearl Tower. The tower supports radio and TV antennas but is also a major tourist attraction.

When I first visited Shanghai in the early 1990s the tower did not exist. Pudong was struggling, and critics said the whole idea of developing Pudong would not work. For a while the critics looked correct. New office buildings had trouble attracting tenants, and rents had to be slashed. But by the time the Oriental Pearl Tower opened in 1995 Pudong was on its way to success.

Over the last decade or so the atmosphere in Shanghai has changed dramatically. There were lots of tourists strolling along the river in the Bund during my first visit to Shanghai. But most of the tourists were foreigners, not Chinese. On my last visit in April 2008, the tourists with digital cameras taking pictures of the Oriental Pearl Tower were Chinese. The same was true in the tourist sections of Southern China. China’s economic success has lifted tens of millions of Chinese up to the middle class, and they now have the money to travel and see the sights of their own country. Shanghai has been a tourist attraction for a very long time. The addition of a large major Disney theme park will add dramatically to Shanghai’s attraction as a destination for Chinese tourists.

Mainland Chinese have to get visas and special permission to visit Hong Kong. That is not the case for Shanghai. The Pudong Disney theme park will open the door to the hundreds of millions of Chinese who have the means to travel to Shanghai. As China’s economy continues to grow millions more will climb up the economic ladder and be able to visit Shanghai and the Disney theme park.

I am not sure how many Americans know that most Chinese admire us. My first visit to mainland China was in 1994. The year before I had been in Hong Kong and took a tourist three day Swire Pacific tour to Beijing. That tiny glimpse of mainland China convinced me that I needed to know a lot more about China. Not the usual government-commercial China that investment bankers see. I wanted to visit rural China and see cities that most business people at the time did not see. I found a way to do that. By sheer luck I found China Span and Keren Su. Keren is a very successful professional photographer who takes small groups of people to visit China. In February 1994 I was off to Hangzhou to join a small group led by Keren.

It is cold in that part of China in February, but outside the city the motels had no heat. Businesses and schools also had no heat. People dressed warmly and stayed that way while they worked in a silk factory or other business. I was impressed that the Chinese smiled and were cheerful in spite of the cold.

I was surprised by the attitudes of the Chinese people we met in towns and villages. They like Americans. In one small village outside Hangzhou the village elder asked us to stay for tea and everyone in the village came to see us. They had never met Americans before. Our local city guide in Hangzhou spoke perfect English, and she sounded like she came from Wisconsin. But, in fact, she had never been outside China and learned English at a school in Hangzhou. In schools all across China they teach English, American English. We are admired in China. They see us as role models as they try to achieve their three goals: work hard, get rich and live a long time.

During my many trips to China I saw Donald Duck and Mickey Mouse dolls and paraphernalia in shops and kiosks in cities large and small. I am sure they were not properly licensed from Disney, but they told me that Chinese children also like Mickey Mouse and company.

When I put these pieces from my personal experience together they tell me that Disney in Pudong will be a tremendous hit and a source of profits for Walt Disney Co. Of course, it will take time to select the land and construct the park. The profits won’t start rolling in until the park actually opens for business. But this move to Shanghai will likely be Disney’s biggest opportunity since Walt first created Mickey & Minnie.

If you invested $1,000 in Disney stock in the fall of 1971 when Disney World opened near Orlando your shares would be worth $33,195 today. And that is after the disastrous 1970s stock market and the worst recession since the great depression. Accumulating shares in Disney between now and when Disneyland Shanghai opens will most likely also produce a huge long term capital gain.

Disclosure: Long Disney

Comments

[Alan Young:]

Okay, it's good for Disney to get a foot in China. But I think you are exaggerating the importance of it.

Disney World 1971 vs. today? That's absurd. You can't compare anything going on now, in China or anywhere else, to the past 38 years. I don't know anyone interested in 38-year-long investment plans. And anyway the value of the franchise is much more weighted to intellectual property than to theme-park traffic.

But you already alluded to the fact that the Chinese will produce Disney-themed products without licenses. This is a certainty, because it doesn't even require criminal intent. Mickey Mouse was created in the 1930s, and there's no reason China should accede to the US rule that the copyright should apply everywhere forever. So to compute the value of the Chinese market to Disney, you'd have to separate the licensing deals (on which they will make nothing) from the cash spending at the theme park (which will make something). Show me the money, and then we'll talk about the value of the deal.

Nov 05 09:16 PM

[huangthomas:]

There is a Disney land in Hong Kong already.

Nov 06 02:44 AM

[jepittman:]

I'm not so sure they will make 'nothing' on their licensing rights. Qualcomm collects royalties on its intellectual property from China as do many other companies. This is a long term story suited for longer term investors. I own a few shares of DIS and found the article interesting.


On Nov 05 09:16 PM Alan Young wrote:

> Okay, it's good for Disney to get a foot in China. But I think you
> are exaggerating the importance of it.
>
> Disney World 1971 vs. today? That's absurd. You can't compare anything
> going on now, in China or anywhere else, to the past 38 years. I
> don't know anyone interested in 38-year-long investment plans. And
> anyway the value of the franchise is much more weighted to intellectual
> property than to theme-park traffic.
>
> But you already alluded to the fact that the Chinese will produce
> Disney-themed products without licenses. This is a certainty, because
> it doesn't even require criminal intent. Mickey Mouse was created
> in the 1930s, and there's no reason China should accede to the US
> rule that the copyright should apply everywhere forever. So to compute
> the value of the Chinese market to Disney, you'd have to separate
> the licensing deals (on which they will make nothing) from the cash
> spending at the theme park (which will make something). Show me the
> money, and then we'll talk about the value of the deal.

Nov 06 08:30 AM

[Ottoh:]

Let's wait and see how they will build it!!!

Nov 06 10:12 PM