Disneyland Hong Kong

Disneyland Hong Kong is one of the most exciting opportunities that the Walt Disney Co. has pursued in recent years. Reeling from their enormous success in Tokyo (the most visited park in the world), Disney is entering the potentially lucrative Chinese/Southeast Asian market with a new theme park set to open in 2005 on Lantau Island in Hong Kong.

The mercurial political and economic climate of Hong Kong has allowed Disney to dictate and receive highly favorable economic terms for the theme park. Disney will invest approximately 20% of the cost while receiving 43% of the revenues. Moreover, a Discounted Cash Flow analysis has demonstrated that Disneyland Hong Kong is financial gold mine.

This document outlines our financial and marketing analyses of the Disneyland Hong Kong theme park. We have concluded that Disneyland Hong Kong is great opportunity for Disney as well as Hong Kong.

Introduction

The Walt Disney Company (hereafter referred to as Disney) is one of the largest entertainment-media companies in the world with revenues this year of over $25 U.S. Billion. The Disney empire is comprised of movie studios, television, merchandising and it’s highly visited theme parks.

The global popularity can be traced to Disney’s insistence on “family” entertainment. Mickey Mouse and his cohorts are the progenitors of wholesome entertainment for over 70 years. But the screen media that they embraced took an innovative step forward in 1955 when Mr. Disney opened Disneyland. Frustrated with amusement parks at the time, Uncle Walt had a vision that parks should embody more than just impersonal rides and concessions. Building upon the rich and popular characters that he invented for cartoons, Walt architected a new kind of amusement park where sections were divided into zones. Sprinkled throughout the park were his characters, all unified by theme. Mr. Disney’s theme park was the first of its kind and while the first couple years were a struggle, eventually Disneyland became the de facto childhood must-do trip.

Mr. Disney always did have a global perspective of his work and the Disney Co. has done nothing less than spread its brand around the world. Ever so popular in Asia, Disney took a gamble and opened a theme park near Tokyo in the 1980’s. This park is now one of the top 3 parks in the world in terms of attendance. Disney also ventured into a difficult European market to open a theme park outside of Paris. While this park struggled financially during the first five years, it has now turned a solid profit and has catapulted into the top 5 world-wide park attendance slot. The turnaround has been so spectacular that Disney will now open a 2^nd park at Disneyland Paris.

Theme parks have been among Disney’s most financially successful ventures, even in downturn economies. Analyses of annual reports and financial statements attest to the high operating margins along with some revenue predictability.

It should almost come as no surprise that Disney has announced plans to open another theme park in Asia at Hong Kong in 2005. This paper will discuss Disney’s foray into this venture by covering topics ranging from opportunities, challenges and financials.

Situation Analysis

Political climate of Hong Kong

Hong Kong’s reversion to Chinese rule on 2 July 1997 has caused some nervousness among the people in Hong Kong. The Chinese government and Hong Kong authorities have vowed that nothing will change in Hong Kong. Much effort has therefore been expended to keep up this image, particularly as the political and economic freedoms of Hong Kong is seen to be one of its key competitive advantages and points of differentiation. As such, the primary issues in Hong Kong politics since the handover have been international confidence in Hong Kong and the question of independence from Beijing, ie, the integrity of the “one country, two systems” model.

There are three main groups of players in Hong Kong politics. First, we will discuss the Hong Kong political parties and the Hong Kong legislature. The Hong Kong legislature has in particular been vigilant to assert it independent. It also wants to be seen as democratic and able to protect the interest of its Hong Kong constituents. The Hong Kong legislature therefore continues to be restive, and seeks opportunities to criticize the Administration. Second, domestic interest groups. The period of Chris Patten’s Governorship in Hong Kong had seen the burgeoning of domestic interest groups and the development of active political groups. Third, the Administration, which has to walk a fine line between pleasing the central authorities in Hong Kong and asserting its independence. Since the handover, the Administration has had to focus on the Hong Kong economy, especially when the handover was followed immediately by the Asian financial crisis. The Administration needs to shift the Hong Kong economy from one that has historically been founded on trade, real estate and low-tech manufacturing to a service center. The building of Disneyland Hong Kong has been part of these efforts. From the perspective of the Government, Disneyland Hong Kong promises to revitalize the Hong Kong tourism industry, create jobs in the service industry, and allow the Government to inject fresh capital into the economy.

Economic climate of Hong Kong

Closely tied to the political changes that are occurring in Hong Kong, the economic climate in Hong Kong has been shaken negatively. It is no secret that Beijing wants Shanghai to become the financial center of China (and most probably all of Asia as well) and in recent years, MNC’s have begun moving their Asian headquarters and offices from Hong Kong to Shanghai.

Hong Kong has been able to achieve tolerable economic growth through mammoth infrastructure projects including the Chep Lep Kok airport and the enormous suspension bridge to Lantau Island. These projects have required large capital investments, large capital equipment and large amounts of labor.

The park will initially introduce 18,000 new jobs and if the park’s attendance estimates are eventually met, about 36,000 jobs will be created. Disneyland Hong Kong also will stimulate the build-out of Lantau Island as a tourist destination. The park gives the government further excuse to continue the vast infrastructure projects that have been continuing for the last several years.

Competition

One major competitor is Ocean Park, a large water-based attraction. This is not a major competitor though because it does not directly compete with Disneyland. If anything, Ocean Park can benefit from the tourism boom that is expected to occur when Disney opens its doors.

Furthermore, Disney’s natural competitors in the United States must have plans for entering the Asian market. Universal Studios, Sea World and even Six Flags must be looking towards cashing in on the opportunities but they must act quickly to enter China before Disney arrives there or else they will have a much more difficult time succeeding.

Disney should not be overly concerned about competition as its brand is second to none in Asia. While they should not rest on their laurels, they certainly have had tremendous success around the globe and know how to ensure that the customer is happy.

With the success of Disneyland coupled with the emergence of Lantau Island as a major tourist destination, it is inevitable that competing parks will be built. But as with central Florida, southern California, and Paris, the other attractions will receive the ancillary benefits because the primary reason that people are going to those locations is because of Disney.

Collaborators

The vastness of the Disneyland project along with the continued development of Lantau Island involves a vast amount of resources and collaborators. Construction companies have been fortunate to take advantage of this massive and sustained boom. In addition to building edifices, these companies have also been involved in large earthworks project ranging from dredging to reclaiming land from the sea.

Travel agents must be salivating at the presumably easy-sell opportunity that Disneyland will provide. Thrown into this mix will be the usual assortments of hotels, restaurants & food services, as well as other travel related participants. For example, in central Florida and now even Disneyland Paris, premium outlet centers have been constructed to provide extensive value shopping for customers. With Asians’ propensities to search for value, we can strongly predict that an outlet center will be built on Lantau Island by the time Disneyland opens.

Investors

The Hong Kong International Theme Parks Ltd. is a joint venture between Disney and the Hong Kong government. Disney put about a 20% investment into this while Hong Kong owns the rest. However, Disney will earn 43% of the revenues/earnings/etc. Disney received such favorable terms mostly because of the economic climate of Hong Kong.

Part of the $3.2 Billion US (HK$27 Billion) cost will handled by debt financing of about HK$3.3 Billion. This debt will be lead by Chase Manhattan Asia, selected because of its outstanding core of dedicated bankers for the leisure industry. Chase was quickly able to secure 6 others leading financial institutions to co-lead the debt along with 24 banks at lower levels. The co-leaders include BNP Paribas, BOCI Capital, Credit Agricole Indosuez, Fuji Bank, HSBC Investment Bank, and Standard Chartered.

This diversified investor base allows the theme park holding company to get attractive interest rates on the debt. The interest rate during the first five years will be 100 basis points above HIBOR and then it gradually increases about 35 basis points every five years until the loan is repaid in 15 years.

Financing Plan

We have estimated the value of Disney Hong to be above $1 US Billion based on a Discounted Cash Flow valuation model. It is important to note that we used conservative estimates for our calculations. On average we used 20% less than Disney’s estimated attendance for the park. Hotel occupancy was taken at 75% rather than over Disney property norms of 90%. Operating Income was calculated based on current margins for the existing parks. Terminal value was calculated using 5 times earnings in year 5. This is normal for real estate investment banking. Discount rate was also conservative for normal.

Marketing Plan

Goal

Disney has targeted to achieve 4 M visitors within the first year of opening in 2005, rising up to 10 M visitors by 2010.

Target Markets. With a target of 4 M visitors per year, and with a local population of 7.2 M, the large majority of visitors to Hong Kong would have to come from overseas. Disney has estimated that of the 5 M tourists, 3.4 M will be from overseas. Taking the performance of Ocean Park as an indication of performance, 95% of these visitors will be from Asian countries, and of these, 75% or 3.23 M will be from mainland China.

We predict that Ocean Park’s demographic breakdown for Disneyland Hong Kong will be similar, ie Hong Kong and China would be main market. This is a departure from Disney’s own projection that its customers would be equally split between Hong Kong, China and Southeast Asia. Because Hong Kong is a relatively expensive city to visit, target Asian tourists would only be from richer industrialized Asian nations. Japan already has a larger Tokyo Disneyland, so there is little incentive for them to visit Hong Kong for its Disneyland. This leaves Singapore and Taiwan, and certain richer segments of Indonesia, Thailand. This market segment has the ability to travel further to the US, where Disney resorts are larger, with better variety of rides. As such, Disneyland itself is unlikely to be the reason for these tourists to go to Hong Kong. This limits Disneyland’s ability to generate new tourists from the industrialized Asian countries. It is more likely that the traditional attractions of Hong Kong, ie, shopping, would be a draw, with Disneyland offering an incentive to stay an extra night. Another limitation is the fact that Hong Kong has not traditionally been seen as a destination for family tourism. There needs to be other supporting infrastructure. It is possible that Disneyland Hong Kong could spur the growth of such complementary industries targeting children and family.

Given the above reasoning, mainland China will be the key market for Hong Kong Disneyland. The value proposition for mainland Chinese would be Western-styled entertainment unavailable in China. However, there are two main obstacles: First, though outward mainland Chinese tourism has been increasing, the majority of tourists have been adults, and not kids. This has implications for the atmosphere of Disneyland Hong Kong, and also the product design. Second, Disneyland will have to work together with the Hong Kong Government authorities to increase the number of visas granted to mainland Chinese. Already, there has been discussion of offering a Disneyland-only visa to mainland Chinese.

Product

Disneyland HK should be marketed as an American family-style theme park. Americana will be the draw. According to market research, the target markets want a slice of America, and do not want a localized version of Disneyland. This is understandable, as Disneyland Hong Kong has to differentiate itself from other Hong Kong attractions such as Ocean Park. Also, Disneyland Hong Kong has to be consistent with its identity as an American brand, with the quintessential American optimism and expectation of magic. Disney has promised that this is what they want to deliver. To do this, Disneyland Hong Kong has to use Western models in advertising and promotion materials.

However, drawing lessons from Disney’s experience in Tokyo Disneyland, the most successful theme park in the world, for Disneyland Hong Kong to succeed, it should market itself as 100% copy of the American original, BUT the onstage reality cannot be truly American. It needs to be an America engineered for the Chinese market, complete with a “spiel” (Disney corporate speak for Disney’s script), idioms and ideology. Eg, in research by Aviad E Raz in the Journal on Popular Culture, Raz pointed out that in Disneyland US, the Main Street attraction was a “repository of American longings” for the small American town. This nostalgia was missing from Tokyo Disneyland’s version, called the World Bazaar, a glass covered shopping mall that serves the gift-giving need of the Japanese. In another example, Raz pointed out the Tokyo Disneyland stages Japanese New Year traditions, eg, the hatsu-mode, where Shinto believers worship in temples and shrines in the New Year. During New Year, Japanese visitors are greeted by Mickey and Minnie dressed in kimonos and by sets of matsu-kazari (special Japanese New Year decorations). Raz’s conclusion was that the Tokyo Disneyland was an example of the active and manipulative use of Western culture, to fit into Japanese cultural understanding. Disneyland Hong Kong has to subtly do the same, to ensure that Chinese visitors are not overwhelmed by the foreignness of Disneyland Hong Kong. Disney has to employ a combination of local market culture and savvy, without undermining its central advertising message that Disneyland Hong Kong is 100% American.

As the park becomes more successful, there will be room for Disney to build Disney Seaworld and other parks, eg, Epcot Center, in Asia. Epcot Center should be considered, especially since Asian markets have a special affinity for technology products. As other parks are built in Hong Kong, Disney should consider building another Disneyland in Shanghai or Beijing. As China becomes more prosperous, DHK would not be able to take all the tourists from mainland China. Disneyland Hong Kong can serve as an introduction to the Disney brand.

Disneyland can also reap tremendous profits from merchandise and souvenirs. The danger lies in Hong Kong and China’s well-known propensity for piracy. Disney has to work closely with the Hong Kong and Chinese authorities to fight piracy. However, bearing in mind that Chinese authorities are famously ineffectively in fighting piracy, it needs to take a parallel approach of selling high quality goods, to differentiate its products from the counterfeits. This strategy would also enable Disney to price its products at premium, and benefit from higher margins. All this would build a cache to buying high quality Disney originals. Also, Disney should restrict the channels through which it sells souvenirs. Original Disney products should only be sold on site in Disneyland Hong Kong. Disney should also consider opening a Disney Store in Hong Kong, Beijing and Shanghai. This achieves the triple purpose of marketing Disneyland Hong Kong, building the Disney brand, and blocking Disney counterfeits.

Promotion

Disneyland Hong Kong will start from the advantage of the publicity generated from its high-profiled negotiations with the Hong Kong Government, and the competition with Shanghai. As such, much less needs to be spent on advertising in Hong Kong and regional countries. However, the challenge is China. Because of the size of China, it is important that Disneyland Hong Kong is focused its advertising and promotion efforts. It should not aim for a mass market. Indeed, there is no need to do so, because 3.2 M is a relatively small slice of the outward tourists from China. The main bulk of advertising and promotion efforts should be to Chinese tour agents, through whom Chinese tourists travel, because of their lack of familiarity with foreign travel. The visit to Hong Kong Disneyland should be sold as a part of a tour package to Hong Kong. This strategy does not demand that Disneyland pursues a mass marketing initiative in mainland China. It can maximize its advertising and promotion dollars by leveraging the resources of Hong Kong tour agents with a network of traditional business links with mainland China. The important element is to provide sufficient incentive for Hong Kong tour agents to include Disneyland Hong Kong in its itinerary. Hong Kong hotels would be an additional channel for promotion, because they have the incentive to encourage tourists to stay an extra night in Hong Kong.

Apart from advertising the entertainment benefits of Hong Kong Disneyland, promotion in Hong Kong needs to take a separate approach of building goodwill for Disney’s presence in Hong Kong. Disneyland Hong Kong needs to be seen as a good corporate citizen in Hong Kong. There are two constituencies that should be targeted: first, the Hong Kong people, and second, the Hong Kong Administration and Legislature. These are strategic relations that can potentially stall Disneyland Hong Kong’s development and success.

The Disneyland deal had been finalized against the backdrop of the 1997 Asian financial crisis, and the relative loss of competitive advantage by Hong Kong to mainland China. Disneyland was part of a larger political and economic plan. First, it helped Hong Kong to maintain the image that Hong Kong remains plugged into the international community, even as it reverted to Chinese political rule. Second, it was to rejuvenate Hong Kong’s tourism industry, by bringing in more tourists. A recent peak in Hong Kong’s inbound tourism was 11.5 M in 1996. By 2020, Hong Kong hopes that Disneyland Hong Kong’s attendance itself would reach 10M.

Disneyland Hong Kong can maintain its goodwill with the Hong Kong public by publicizing its contribution to the local economy by creating 18,400 Hong Kong jobs. It can act as a good corporate citizen by showing support for various well-selected community causes, eg, education and children’s welfare initiatives.

It is important that Disneyland Hong Kong gains support among Hong Kong’s restive legislature, which is anxious to keep an active role in ensuring political freedom in Hong Kong. Already, the Disneyland deal has run into trouble with the legislators and environmental groups over its expected economic and environmental impact. Citing the impact on local wildlife on Lantau Island, legislators have proposed a veto of the $410 M funding package for the second phase of development, unless plans for infrastructure and other groundwork is revised. Apart from relations with the legislature, Hong Kong Disneyland will need to have a special person appointed to deal with its relationship with the Hong Kong Government, a major investor, and also the Hong Kong tourism authorities, which has a special stake in the Hong Kong Disneyland project. As a foreigner in Hong Kong, it is important for Disneyland to preserve good relations with these authorities, and also for the potential economic connections that these constituencies can throw up.

Disney has to pay special attention to this aspect, because it does not have experience dealing with the foreign governments. Tokyo Disneyland and Paris Disneyland had both been the result of licenses to foreign operators. Disneyland Hong Kong is going to the Disney’s first direct venture overseas.

Company Management

Apart from considering operational and technical capabilities, Hong Kong Disneyland’s choice of company management must take into consideration its strategic and marketing plans.

To maintain its image as a quintessentially American project, we believe that the CEO should be a Caucasian American. He/She would be the spokesperson and public face of Disneyland Hong Kong. However, the second-in-command and a large portion of senior management should be Hong Kong or Chinese. They should have a cultural understanding of Hong Kong and China, but also, should offer strong links to Hong Kong’s tourism industry. They would also to prevent any backlash of anti-American nationalism and cultural imperialism, especially when Hong Kong Disneyland will be an American venture invested with Hong Kong government money.

Conclusion

Given the favorable terms for Disneyland Hong Kong, the financials for Hong Kong Disneyland show that Disneyland Hong Kong is a sure-win for Disney. Key success factors for Disney’s success will be Disney’s relationship with the Hong Kong people, legislature and Government, and also Disney’s ability to balance the localization of the product to Chinese tastes with maintenance of a 100% American image.

Disney needs to think long term about the Disneyland Hong Kong venture. At only 126 hectares, Disneyland Hong Kong cannot maximize the potential of the large Chinese market. Disney’s long-term plan should be to build at least one, or even two, Disneylands in mainland China. If two Disneylands have sufficiently served the US market, then there must be room for at least two Disneylands in mainland China. The mainland Chinese market is not mature enough for Disneyland. Disney should use the park to seed Disney’s brand in mainland China and build up expertise about building, operating and marketing Disney in China and to the Chinese people. It should also use Disneyland Hong Kong to gain experience with dealing with the Chinese government, and to use the connections in Hong Kong to identify local Chinese partners, with whom it can enter the mainland.