Disney: 'Made In China'

| About: The Walt (DIS)

Summary

DIS is preparing to make its own branded movie in China with Shanghai Media Group.

Incremental positive given China’s box office outlook and tourism demand.

Remain cautious on DIS due to ESPN weakness.

Disney (NYSE:DIS) CEO Robert Iger said that DIS is preparing to make its own branded movie in China and at least one will be in production within a year. With China expected to be the world's largest movie market and the recent opening of Shanghai Disney that is expected to elevate the Disney brand among Chinese consumers, it makes sense for DIS to create a made-in-China movie to adapt to the local market. In short, I see this to be an incremental positive for DIS to expand in the country and the existing China strategy could prove to be highly accretive to DIS studios and theme park segments. Although I prefer DIS given its content ownership and media assets, I am staying on the sidelines due to the uncertainties surrounding ESPN and cable unbundling/cord-cutting trend. My preferred pick among the media names are LionsGate (LGF) and Time Warner (NYSE:TWX), which I see to be well-positioned for the OTT world.

DIS is partnering with state-owned Shanghai Media Group to make Disney-branded films in China and this appears to be the second partnership following the 2014 partnership in which the companies agreed to co-develop movies for the Chinese market. Worth reminding investors that Shanghai Media Group is a major media SOE with businesses in films, TV channels and radio. The company is also one of few that holds an internet content distribution license which could prove to be valuable for DIS if it decides to form a JV on direct-to-consumer OTT service in China.

More important, partnering with SMG could allow DIS to smooth the regulatory requirement involved with film distribution and production. Currently, foreign films are limited to 25% of the total box off share and only 34 imported films are allowed in China per year. Additionally, the blackout period favors the local content in that foreign films are unable to be released during holiday period. A partnership with SMG could bypass these regulatory hurdles and allow DIS products to reach a broader audience. Worth reminding investors that Iron Man 3 was co-produced with Beijing film studio DMG Entertainment so working with a Chinese film company is nothing new for DIS.

Besides box office success, DIS's decision to partner with local studios could also boost brand awareness of its Shanghai Disney resort. Given that China's population is gradually turning into a V-shape demographic profile where empty nesters are unleashing their savings on affordable luxuries such as travel, DIS is well positioned to benefit from the growing travel trend. This is on top of the growing middle class that is already presenting a favourable tailwind for DIS resort, in my view.

In conclusion, remain cautious on DIS due to uncertainties over ESPN but I see the recent opening of DIS resort and the partnership on film production to be an incremental positive.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.