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Is Hong Kong Disneyland an Albatross Around Disney’s Neck?

Walt Disney is a powerhouse entertainment company, not least because its name adorns some of the most popular theme parks in the world. One of these is Hong Kong Disneyland, which occupies strategic real estate on Lantau Island. But while the company calls its original California theme park “The Happiest Place On Earth,” that might not apply to Hong Kong Disneyland, which has mostly booked annual losses since opening in 2005.

Walt Disney is famously — and often spectacularly — profitable. Has, or will, the Hong Kong property drag the company down?

Modest size, modest results

By the splashy standards of Walt Disney, Hong Kong Disneyland is actually quite modest. Since it needs to squeeze into the tight confines of Hong Kong, it’s the smallest of the company’s theme parks, a set of sprawling assets that include:

  • Disneyland and Disney’s California Adventure (Anaheim, California)
  • Walt Disney World and Epcot (Orlando, Florida)
  • Disneyland Paris (Paris, France)
  • Shanghai Disney (Shanghai)
  • Tokyo Disney (Tokyo)

Hong Kong Disneyland’s small size works against it, limiting the number of “guests” it can accommodate in one day — around 34,000 in total, again the lowest figure of the six parks.

In its now 13-year history, Hong Kong Disneyland has been profitable on the bottom line only three times. In its fiscal 2017, it booked a net loss of HK$345 million, which was twice as deep as the previous year’s shortfall.

Management attributed this to expansion efforts — in late 2017, it launched a US$1.4 billion (HK$10.9 billion) program to build out new attractions and refresh existing ones. Meanwhile, the company didn’t hesitate to point out that it saw a gain in revenue (up 8% year over year to HK$5.1 billion) and an uptick in guest numbers by 3% to 6.2 million that fiscal year.

The disparity between those two percentage figures, however, owes largely to an increase in ticket prices. At the end of 2017, its prices for adult and child one-day admission increased by a respective 5% and 9% (to $HK589 and $HK419). That marked the fifth such price hike in as many years.

This struggle shouldn’t come as a surprise. For mainland Chinese tourists, resorts on Macau are making a play for the family segment. Big casino operators such are packing family attractions into sprawling casino resorts, such as Las Vegas Sands’Parisian Macao. With its recently built complexes, Macau still has some novelty value, as does Walt Disney’s own Disneyland Shanghai. In spite of recent difficulties, Macau has managed to grow its visitor numbers lately, while Disneyland Shanghai has been a hot ticket on the mainland. So why would a mainland family in the vicinity of that big city bother going to the smaller, older Hong Kong resort?

The Mouse that roars

Therefore, Hong Kong Disneyland can’t be considered the prize asset in Walt Disney’s collection of theme parks. That said, its overall effect on the sprawling company’s business is fairly limited.

“The Mouse” (as Walt Disney is nicknamed) only has a 47% minority shareholding in the resort’s immediate owner, Hong Kong International Theme Parks. The government of Hong Kong owns the remaining 53%. According to Walt Disney’s latest annual report, the American company “is entitled to receive royalties and management fees” based on the resort’s operating performance.

We don’t know how much Walt Disney earns from this, since the company doesn’t break out Hong Kong Disneyland results in its financial reporting. Zooming out, in Walt Disney’s most recent fiscal year its parks and resorts division saw an 8% rise in revenue (to $18.4 billion, or HK$144 billion), and a 14% improvement in operating income. Theme parks represented the only one of the company’s four divisions to show growth in either metric.

A word about those four business units: Collectively that year, they brought in a total of $55 billion (HK$430 billion) in revenue. And none comprised more than 50% of that tally. The largest division, media networks (essentially the company’s TV properties, like the ABC network) brought in just under 43% of the total.

Not only is parks and resorts as a unit improving its revenue and profitability, but it’s also part of a much larger whole. So while Hong Kong Disneyland’s performance might not be worth bragging about, it’s not a serious financial burden to Walt Disney the company.

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Disclosure: Motley Fool Hong Kong contributor Eric Volkman owns shares of Walt Disney (NYSE: DIS). Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.