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The Walt Disney Company (DIS)’s China Parks Facing Both Growth and Competition

Disneyland is going strong in Hong Kong as the theme park posted its first annual profit since its opening seven years ago. Attendance set a record of 6.7 million visitors, up 13% from a year ago. The park, which is 52% owned by the local government and 48% owned by The Walt Disney Company (NYSE:DIS) , swung to a profit of $15.05 million (HK$109 million) for the fiscal year ended Sep-2012 from a loss of $30.56 million (HK$237 million) in 2011. This is a significant turnaround considering the difficulty we saw in the Chinese economy in 2012, which saw gaming revenues in Macau slow down. Revenues went up by 18% to $550 million while resort occupancy per 1,000 rooms increased by 1 point to 92%. Not a bad year for a park that has been under serious criticism for the past year–but, just in time given the 2015 projected opening for Shanghai Disneyland.

The Walt Disney Company (NYSE:DIS)Disneyland Hong Kong is the company’s smallest theme park. No concrete expansion plans for the long term have been released, but they can be discussed now that six years of losses can be ameliorated somewhat. This investment in Hong Kong will have to take place with the Shanghai park on the horizon. Nearly 67% of its visitors come from outside of Hong Kong, mostly from mainland China (45%). Shanghai Disneyland will be a significant draw down on attendance if it is not maintained.

Disney’s Shanghai venture is in collaboration with the Shanghai Government, which holds a 57% stake, while Disney owns the rest. The park has been driving most of the foreign investment in the city and comes with a price tag of $4.4 billion. The Shanghai Government planned to invest $1.58 billion to build infrastructure for the park and $695 million to construct a subway that would connect the park with the city center.

However, The Walt Disney Company (NYSE:DIS) is not the only one eyeing the pockets of China’s rising and affluent middle-class, particularly those living in Shanghai, which has become a popular tourist destination. Disney’s rival Dreamworks Animation Skg Inc (NASDAQ:DWA) – with its Kung Fu Panda, Shrek and Madagascar franchises – is also planning to open an entertainment district in Shanghai by investing $3.2 billion for a 2016 projected opening day. Dreamworks will also base Oriental Dreamworks, its new $350 million joint venture with Chinese partners, at the park. Unlike The Walt Disney Company (NYSE:DIS), Dreamworks is focusing on the “world’s largest IMAX theatre, three Broadway-style theaters, smaller performance halls, restaurants, shops”

Among the most popular theme parks already open in Shanghai is the World of Warcraft inspired ‘Joyland,’ which is just two hours’ drive away from Shanghai. Rovio, the Finnish creator of the iconic game, Angry Birds, has already opened its office in Shanghai and is developing an ‘activity park’ at the Tongji University, Shanghai.

In essence, while Shanghai Disneyland is more anticipated than any other theme park, it is going to face tough competition from local as well as international rivals. This further pressures Disneyland Hong Kong to continue finding ways to attract visitors after piling up HK$3.8 billion (~$490 million US) in losses since 2008.

Disney’s theme parks seem to have turned the revenue and profitability corner, with the exception of Euroland Disney. In its last quarterly report released earlier in February, The Walt Disney Company (NYSE:DIS) reported a 5.2% increase in revenues to $11.34 billion, while its net income dropped by 5.5% to $1.38 billion. During the quarter, the revenues from parks and resorts rose by 7% to $3.4 billion, but operating income also rose by 4.3% to $577 million. The segment is the second biggest contributor to the company’s top and bottom—constituting 30% of total sales.