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March 19, 2009

Disney Scraps Hong Kong Park Expansion to Shift Focus to Shanghai?

The Wall Street Journal is reporting that Disney (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 the 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.

Posted by Steve Birenberg at March 19, 2009 10:01 AM in DIS