Shanghai Disneyland
February 24, 2003February 24, 2003
BA 456BA 456
Tera Ferguson
Jose Luis Guerrero
Kristy Harris
Wenny Tung
Scott Yancey
Agenda
Case IntroductionCase Introduction
BackgroundBackground
Project DescriptionProject Description
Our AnalysisOur Analysis
RecommendationRecommendation
Questions?Questions?
The Walt Disney Company
Entertainment Conglomerate consisting of Entertainment Conglomerate consisting of
Media, Studio Entertainment, Consumer Media, Studio Entertainment, Consumer
Products and Theme Parks & ResortsProducts and Theme Parks & Resorts
Theme Park & Resorts DivisionTheme Park & Resorts Division
Current Park Locations: Anaheim, Orlando, Tokyo, Current Park Locations: Anaheim, Orlando, Tokyo,
Paris, Hong Kong (2005)Paris, Hong Kong (2005)
Also includes: The Disney Cruise Line, Disney Also includes: The Disney Cruise Line, Disney
Regional Entertainment, The Disney Vacation Club, Regional Entertainment, The Disney Vacation Club,
The Anaheim Angels, and the Mighty Ducks of The Anaheim Angels, and the Mighty Ducks of
AnaheimAnaheim
Revenues of $7 Billion in 2001, or 28% of company-Revenues of $7 Billion in 2001, or 28% of company-
wide revenuewide revenue
Disney’s Interest in China
Long-term Long-term
Consistently searching for areas of expansion Consistently searching for areas of expansion
where there are un-captured marketswhere there are un-captured markets
Current Current
Government relations established through the Hong Government relations established through the Hong
Kong Disneyland project indicate easier entry into Kong Disneyland project indicate easier entry into
the mainlandthe mainland
Competitive Competitive
Universal-Vivendi’s land purchase in Shanghai and Universal-Vivendi’s land purchase in Shanghai and
proposed expansion into Beijingproposed expansion into Beijing
Agenda
Case IntroductionCase Introduction
BackgroundBackground
Project DescriptionProject Description
Our AnalysisOur Analysis
RecommendationRecommendation
Questions?Questions?
Background: Disney Parks
Disneyland, Anaheim: 1955Disneyland, Anaheim: 1955
Walt Disney World, Orlando: 1971Walt Disney World, Orlando: 1971
Tokyo Disneyland:1983Tokyo Disneyland:1983
Owned and operated by the Oriental Land CompanyOwned and operated by the Oriental Land Company
Deal structure indicative of financial turmoil within the Deal structure indicative of financial turmoil within the
company in the early 1980s with a 0% Equity stakecompany in the early 1980s with a 0% Equity stake
Revenue from royalties and management feesRevenue from royalties and management fees
Disneyland Paris/Euro Disneyland: 1992Disneyland Paris/Euro Disneyland: 1992
Disney retains 39% of Equity Interest and receives Disney retains 39% of Equity Interest and receives
management fees as part of reported revenuemanagement fees as part of reported revenue
Hong Kong Disneyland
$ Billion USD Project$ Billion USD Project
60% Debt60% Debt
80% Government80% Government
20% Commercial20% Commercial
40% Equity40% Equity
43% Disney43% Disney
57% Government (will eventually sell down ownership stake)57% Government (will eventually sell down ownership stake)
6 Million Visitors in its first full operating year, and 6 Million Visitors in its first full operating year, and
Million additional visitors to Hong KongMillion additional visitors to Hong Kong
$148 Billion value added boost to the Hong Kong $148 Billion value added boost to the Hong Kong
economy over the next 40 yearseconomy over the next 40 years
35,800 jobs created in the next 20 years35,800 jobs created in the next 20 years
Background: China
Largest population in the world with relatively slow projected Largest population in the world with relatively slow projected
population growthpopulation growth
B (2001) - B (2050F) B (2001) - B (2050F)
63 - 70% Rural63 - 70% Rural
High growth rates in GDP and foreign direct investment (FDI)High growth rates in GDP and foreign direct investment (FDI)
Urban income growth of % in 2002, Urban income growth of % in 2002,
Growth in FDI of % in 2002Growth in FDI of % in 2002
2003F: US$58 B2003F: US$58 B
2004F: US$62 B2004F: US$62 B
Accession to the World Trade Organization in December 2001Accession to the World Trade Organization in December 2001
Increased support for private and foreign investmentsIncreased support for private and foreign investments
Theme parks still fall under Restricted Foreign Investment Theme parks still fall under Restricted Foreign Investment
IndustriesIndustries
Theme Parks in China
Most parks in China were American-themedMost parks in China were American-themed
Few have survived mainly because of Few have survived mainly because of
transportation issuestransportation issues
Admission Prices: 56 – 100 yuan ($6 – $12)Admission Prices: 56 – 100 yuan ($6 – $12)
Park Sizes: 70 – 150 acresPark Sizes: 70 – 150 acres
Universal-Vivendi December 2002 agreement to Universal-Vivendi December 2002 agreement to
build a park in Shanghaibuild a park in Shanghai
Projected park opening in 2006, with more than 8 million Projected park opening in 2006, with more than 8 million
visitors in the first yearvisitors in the first year
In discussions to build a similar park in BeijingIn discussions to build a similar park in Beijing
Background: Why Shanghai?
China Shanghai
Shanghai leads in GDP and Shanghai leads in GDP and
FDI in ChinaFDI in China
GDP US$4,512 (2001)GDP US$4,512 (2001)
9% of total FDI in China9% of total FDI in China
Shanghai residents (2002)Shanghai residents (2002)
M, including floating M, including floating
populationpopulation
Average household size is household size is
Tourist population (2000)Tourist population (2000)
mainland mainland domestic
million foreign million foreign overseas
million
* 2000 figures
Agenda
Case IntroductionCase Introduction
BackgroundBackground
Project DescriptionProject Description
Our AnalysisOur Analysis
RecommendationRecommendation
Questions?Questions?
Park Location is Key
Significant infrastructure Significant infrastructure
development is occurring to development is occurring to
support the 2010 Exposupport the 2010 Expo
Expo Site
and
Universal
Property
Target Market
Target Local MarketTarget Local Market (million)(million)
By Income Level (yuan)By Income Level (yuan)
30,000 – 60,00030,000 – 60,000
60,000 – 90,00060,000 – 90,000
> 100,000> 100,000
Total Local Market (based on income)Total Local Market (based on income)
Tourist MarketTourist Market (million)(million)
Domestic (Mainland)Domestic (Mainland)
Overseas - ForeignOverseas - Foreign
Overseas - DomesticOverseas - Domestic
Total Target MarketTotal Target Market
* * Based on 2008F Population numbersBased on 2008F Population numbers
Project Structure
Billion US$ total capital Billion US$ total capital investment
60% Debt60% Debt
80% Government80% Government
20% Commercial20% Commercial
40% Equity40% Equity
43% Disney43% Disney
57% Government57% Government
Million Visitors in its first full operating year and Million Visitors in its first full operating year and
average annual growth of %average annual growth of %
Corporate tax rate of 30%, with tax loss carry-forwards Corporate tax rate of 30%, with tax loss carry-forwards
permitted for five yearspermitted for five years
Operating Cash Flows
Admissions (50%)Admissions (50%)
Food and beverage Food and beverage
(%)(%)
Merchandise (%)Merchandise (%)
Main entrance (1%)Main entrance (1%)
Park labor and overheadPark labor and overhead
Maintenance materialsMaintenance materials
Entertainment Entertainment
(costuming, labor, etc.)(costuming, labor, etc.)
Food and beverage Food and beverage
COGSCOGS
Merchandise COGSMerchandise COGS
Support laborSupport labor
MiscellaneousMiscellaneous
RevenuesRevenues CostsCosts
Discussion
Agenda
Case IntroductionCase Introduction
BackgroundBackground
Project DescriptionProject Description
Our AnalysisOur Analysis
RecommendationRecommendation
Questions?Questions?
Risk Analysis - Sovereign
Currency risk is not mitigated by this project since the Currency risk is not mitigated by this project since the
majority of cash inflows and outflows are in local currencymajority of cash inflows and outflows are in local currency
Expropriation risk is mitigated some with the government Expropriation risk is mitigated some with the government
taking a controlling equity staketaking a controlling equity stake
No other commercial or multi-lateral agency partners are No other commercial or multi-lateral agency partners are
involved in the projectinvolved in the project
Because the project is in the tourism industry and involves Because the project is in the tourism industry and involves
an American cultural icon, the susceptibility to strikes or an American cultural icon, the susceptibility to strikes or
terrorism is slightly higher than averageterrorism is slightly higher than average
The project’s location in Shanghai reduces the overall risk The project’s location in Shanghai reduces the overall risk
of natural disasters when compared to country averagesof natural disasters when compared to country averages
Risk Analysis – Operating
and Financial
The technology for this project will be provided by Disney The technology for this project will be provided by Disney
and is proven in other locationsand is proven in other locations
Potentially lengthy negotiations with the Chinese Potentially lengthy negotiations with the Chinese
government increases start-up risks slightlygovernment increases start-up risks slightly
Given the project is very service oriented, there is some Given the project is very service oriented, there is some
risk associated with the level of control assumed by the risk associated with the level of control assumed by the
government, but this is difficult to quantifygovernment, but this is difficult to quantify
There are no financial mitigating factors ― rather, this There are no financial mitigating factors ― rather, this
project is closely tied to the governmentproject is closely tied to the government
Real option: A minor amount of cannibalization from the Real option: A minor amount of cannibalization from the
Hong Kong property may be expectedHong Kong property may be expected
Cost of Capital
ICCRCICCRC %%
. Risk . Risk Free %%
. Risk . Risk Premium %%
China’s Country Credit RatingChina’s Country Credit Rating
Anchored to . cost of equityAnchored to . cost of equity
AdjustmentsAdjustments
Industry beta adjustmentIndustry beta adjustment %%
ExpropriationExpropriation %%
Start-up risks assoc. with Gov’t negotiationsStart-up risks assoc. with Gov’t negotiations +%+%
Sensitivity to strikes, terrorismSensitivity to strikes, terrorism +%+%
Sensitivity to natural disastersSensitivity to natural disasters %%
Real option: Cannibalization from HK DisneyReal option: Cannibalization from HK Disney +%+%
Project Cost of CapitalProject Cost of Capital %%
Cash Flow Analysis
* Cash flows analyzed through 2029 (per Disney, typical 20-25 year financial analysis time horizon)
Real Options
Option to wait until Universal Studios opensOption to wait until Universal Studios opens
Already losing any first mover advantageAlready losing any first mover advantage
Universal’s track record at opening resorts is not on par with Universal’s track record at opening resorts is not on par with
Disney’s ― lessons learned from Universal may be minimalDisney’s ― lessons learned from Universal may be minimal
Build a resort hotel in conjunction with the parkBuild a resort hotel in conjunction with the park
Build a “Downtown Disney” entertainment center adjacent Build a “Downtown Disney” entertainment center adjacent
to parkto park
Build another gate after several years of operation (double Build another gate after several years of operation (double
park size)park size)
Agenda
Case IntroductionCase Introduction
BackgroundBackground
Project DescriptionProject Description
Our AnalysisOur Analysis
RecommendationRecommendation
Questions?Questions?
Recommendation
Begin negotiations with Chinese governmentBegin negotiations with Chinese government
Government equity stake and debt provisionsGovernment equity stake and debt provisions
Land and infrastructure provisionsLand and infrastructure provisions
Disney must make the argument that a Disney must make the argument that a
Shanghai Park would not substantially damage Shanghai Park would not substantially damage
Hong KongHong Kong
Escalating political tensions on the Korean Escalating political tensions on the Korean
peninsula could change the risk assessmentpeninsula could change the risk assessment
Questions?
Ticket Price Projection
Demand Projections
Revenue Projections
Operating Costs
Capital Structure
Depreciation
