Disney Deep Dive: The Economics of Hong Kong Disneyland Resort

Last week we launched the latest report in our Skift Research Reports service, A Deep Dive Into Disney’s Competitive Position In Travel.

Our latest report provides a strategic and financial analysis of Disney’s parks in Hong Kong, Shanghai, Tokyo, and Paris. Throughout the report we also address local economics and trends impacting each park.

Below is an excerpt from our Skift Research Report. Get the full report here to stay ahead of this trend.

Disney owns 47 percent of the Hong Kong Disneyland Resort through Hong Kong International Theme Parks Limited, an entity in which the government of the Hong Kong Special Administrative Region (HKSAR) owns a 53 percent majority interest. The resort is located on 310 acres on Lantau Island, which is 10 minutes from Hong Kong International Airport and 30 minutes from the city. The resort includes one theme park and two themed resort hotels with 1,000 rooms; a third hotel with 750 rooms is under construction and should open in 2017.

A separate Hong Kong subsidiary of Disney (100 percent owned) is responsible for managing Hong Kong Disneyland Resort where Disney receives royalties and management fees based on the operating performance of Hong Kong Disneyland Resort.

Consumer Response

Hong Kong attendance dipped 20 percent in 2007 after the initial pop on the first full year of opening. Since then, attendance steadily rose almost nine percent per year until declining nine percent in 2015 as the economy weakened. The decline resulted from a slowdown in the broader Hong Kong travel and leisure market from factors like societal sentiment affecting destination selection and the increased competitiveness of other Asian destinations as a result of exchange rates and Chinese travel policies. The key reason for the decline overall was a drop in visitors from mainland China.

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Source: Themed Entertainment Association/AECOM

The breakdown of visitors by region was as follows:

Financials

Below are the historic financials for Hong Kong Disneyland. We converted from Hong Kong dollars to USD at a 0.13 exchange rate across all time periods.

Revenue had been growing at a 16 percent average rate from 2010 through 2014 before slowing in 2015.

EBITDA margin jumped to the 20 percent level before dipping back to 16 percent last year. Depreciation weighed on net income and operating income.

One thing that also jumps out is that the capital structure has become much more conservative. Back in 2008, long-term debt to equity stood at 1.5. By 2015, it fell to 0.09. The first step was a 2009 share conversion. From there, long-term debt continued to be reduced while shareholder equity increased. Over that time period, interest expense dropped meaningfully. As we have seen in Paris, having too much debt can be very damaging to the theme park business in terms of profitability.

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Source: Hong Kong Disneyland Filings

Estimated Economic Impact to Disney

According to publicly available documents from Hong Kong’s Legislative
Council Secretariat, Walt Disney receives:

1. Base management fee at 2 percent of revenue
2. Variable management fee at 2 to 8 percent of EBITDA
3. Undisclosed royalty stream as a percentage of revenue.

Additionally, Walt Disney would consolidate its ownership stake, economically being entitled to 47 percent of net income (or losses).

We believe that the net impact from the park and two hotels has been total fees equating to approximately five percent of revenue. While not a large amount, this helped push the brand into China and was the gateway for the much larger Shanghai opportunity.

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