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The Walt Disney Company established its first theme park in 1955 in Anaheim,
California. The company (also vested in Media Networks, Studio Entertainment, and
Consumer Products) has since opened theme parks in Orlando, Florida, Tokyo, Japan,
and Paris, France. More recently, Disney broke ground in Hong Kong with the intention
of launching Hong Kong Disneyland on Lantau Island for approximately $2 Billion in
hopes of reaching what has largely been an untapped Chinese market.
Given competitor Universal Vivendi’s current plans to build a theme park for less than
$100 Million in Shanghai around 2006, Disney’s entry into China’s mainland has been a
source of speculation. The main issues surrounding a Shanghai capital investment
include financial potential of a new theme park and the potential qualitative and
quantitative risks involved.
After reading and solving this case, the student should be able to:

Forecast cash flows based upon sensitivities pertinent to a service-oriented
company in an emerging market
Evaluate effect of country risk upon discount rates to determine whether or not to
enter an investment
Understand the financial and economic effects of an emerging market government
on a project
Understand alternative ways of structuring a deal within an emerging market

An MBA student who has solved this case should be able to develop a thorough
understanding of how to evaluate risk and financial return within an emerging market. In
order to do this, the following solution is recommended.

The demographics of potential attendees not only help to size the market for Shanghai
Disneyland, but also determine the required size of the park and average ticket price. This
assessment is crucial since the average Shanghai resident (including both urban and rural)
has an annual income of only $1,000 USD. Although setting an affordable ticket price is
necessary to attract visitors, the tickets should also be priced to cover most of the
operating costs, since ticket prices generate 50% of total park revenues. Determining the
size of the market requires us to look at both the local Shanghai residents and its tourist
market. These groups are discussed below separately.
Shanghai Residents
Rural Households


The income floor used in this analysis is 30. Urban Households Urban Households should be considered for this market for several reasons. shop. Shanghai Disneyland is estimated to capture 15% of this market. 12% was assumed for the mainland domestic tourists and 1% for the overseas domestic tourists. inhibiting them from this type of entertainment. Attracting the urban market requires sub-segmenting this 16 million populated group based on their wealth distribution. only 5% of this market will add an additional 75. it is expected that Shanghai’s wealth distribution is slightly improved when compared to the overall country distribution.000 to the captured market. The total market size for Shanghai amusement parks is estimated at roughly 72 million. Most rural residents live in poverty. However.8 million visitors to the captured market for Shanghai Disneyland.5 million domestic tourists visited Shanghai. its view of this park will influence other Chinese visitors that may travel to Shanghai Disneyland. This puts Shanghai Disneyland with an estimated 2 . The percentage of attendees estimated in this mid-to-upper group (80%) comprise of roughly 4 million visitors. An income floor should be set for the target market to determine the potential penetration rate for the mid-to-upper income group. which reduces the urban segment to 5 million.600 USD). which adds roughly 7. Shanghai is one of the wealthiest cities in China and its residents are considered the trendsetters of the country.000 yuan ($3. Even though China has an income disparity and lacks a middle-income group. the key segments for Shanghai Disneyland are local mid-to-upper income urban residents. rural residents not considered peasants lack enough disposable income to attend the park after their normal expenditures have been covered. Many of the tourists were visiting Shanghai to conduct business. 65. or visit family and friends.Rural households were ruled out from this market for several reasons. Foreign Tourists The same methodology applied for domestic tourists is considered for the foreign segment. and foreign tourists. In our assessment. Based on the above market analysis. with a 25% penetration from Shanghai urban residents and a 10% penetration from the tourist market. it is very unlikely that Shanghai Disneyland will capture this market. Therefore. domestic tourists. estimates of the wealth distribution of Shanghai should be assessed separately. Shanghai Disneyland’s 2010 Captured Market Based on the demographic information provided. Tourist Market Domestic Tourists The tourist industry in Shanghai is very large and provides a large influx of money into the city. A conservative estimate of the penetration rate of this market is required. Therefore. In 2000. Also. Therefore.

To do this. The tourism industry is significantly affected by strikes. operating. Sovereign Risks The principal risk in a communist country is most likely expropriation.10% cost of equity.10 was assumed. Shanghai Disneyland’s cash flows will not be greatly affected by currency risk since the majority of the cash flows and debt service will be in the local currency. a minor amount of cannibalization can be expected given the infrastructure of the country and the relatively light travel patterns of the population between these areas. the Government’s dependence on Disney to operate and market the venture mitigates any major expropriation risk.10. The details are discussed below and the results are contained in Exhibit 2.S. However. risk free rate and a 4% U. From this analysis it was concluded that some components of the sovereign. including possible cannibalization from Hong Kong Disneyland. this risk has been mitigated in this project since the government will have a controlling equity stake (57%) in the project. a standard 4% U. and war or terrorism would clearly have a severe and adverse impact on revenues in this sector. Major risks elements that would be affected by the project were identified and analyzed and compared to a typical project in China. 3 . and financial risks needed to be adjusted.S. adjustments were made to this implied cost of equity by accounting for project-specific risks that may differ from the overall risks of the country. See Exhibits 1a and 1b for more details on this analysis. China is a country with a considerable level of risk for natural disasters. However. Operating and Financial risks There are a number of relevant operating risks. Having a company that is an American cultural icon as a large equity holder could further increase these risks. These factors provided a 16. To accurately obtain the cost of equity for the Shanghai Disneyland project.S. The sensitivity of the project to wars. Credit Rating of 93. The institutional investor credit rating for China is 58. and terrorism is higher than the average foreign investment project in this country.64 million visitors in its first year of operation.90 out of 100. but the project’s location in Shanghai reduces the overall risk of natural disasters when compared to country averages. Also. strikes. RISK ANALYSIS The International Cost of Capital and risk calculator (ICCRC) theory was used to obtain the cost of capital. risk premium with a current U.

This number was based on information from other Disney parks adjusted for the Shanghai market. the adjustments for the tourism sector and the project specific risks reduce the cost of equity required by the shareholders from 16. lockers. Merchandise and food and beverage revenues were estimated assuming a fixed level of income ($5. and 7. To keep things simple. this project is closely tied to the government. only two ticket types were assumed – a one-day pass and an annual pass.27B (based on the Hong Kong park and Universal’s investment in Shanghai). and hotel revenues.09%. It was assumed this number would grow every year at the rate of inflation (3%). food and beverage. these are for new attractions at the park and upgrades for the hotel Revenues Revenues were assumed to come from the following sources: park admissions. therefore there are no financial mitigating factors.10% to 16.). An initial attendance of 10.     The project was conservatively assumed to be $1. 90% of attendance is expected from one-day passes.5M in 2008.03 each for merchandise and food & beverage in 2008) for each visitor to the park. main entrance fees (parking. 4 .The technology for this project would be provided by Disney. Main entrance fees are small and were assumed to be $0. 6.5% annual rate. Capital Structure The capital structure information is summarized in Exhibit 9.52M in 2009 and grow by 3% (inflation) every year.64M was assumed for 2008 and based on past attendance figures for other Disney venues. Admissions revenues were based on attendance figures from Exhibit 1B and ticket price information from Exhibit 5. In summary. including $70M for construction of one hotel Structure is 60% Debt / 40% Equity with Disney holding 43% of the equity Investment schedule of the capital is spread over 5 year construction period from 2004-2008 On-going capital expenditures are assumed to start at $38. The revenue calculations are summarized in Exhibits 5. rather. this number was expected to grow at a 1. etc. CASH FLOW ANALYSIS The assumptions and results of the cash flow analysis used in this solution are documented below. merchandise.

were made for the Shanghai market Hotel operating expenses (Exhibit 7) were assumed to be 65% of hotel revenues $20M in startup costs for advertising and marketing were assumed in 2008 5% royalty fees that would be paid to Disney were assumed to be an expense for this project Debt Repayment A proposed debt repayment schedule is provided in Exhibit 10.     Debt was taken on according to the investment schedule in Exhibit 9 Repayment begins in 2008 with the beginning of operations Debt accumulates interest in years 2004-2017 Assumed repayment horizon of 10 years with equal annual payments and an interest rate of 6% Depreciation A depreciation schedule is included in Exhibit 11.     Park operating expense information (Exhibit 8) was based on data from other Disney venues – adjustments. IRR. 5 . Deductions for interest on debt and depreciation expenses are allowable. Note in Exhibit 3 that the losses from 2004-2007 were carried forward to 2008 and 2009.   China allows straight-line depreciation over 20 years Assumed began depreciating assets as soon as investment was made Taxes The corporate tax rate in China is 30%. NPV. The result is a positive NPV of $19. IRR and Cash Flow calculations are summarized in Exhibit 3. particularly for cheaper labor and merchandise. losses can be carried forward for five years. 7.09% hurdle rate). Additionally.2M and an IRR of 17% (which is greater than the 16.Finally. These conservative estimates were based on a moderate level hotel. and 8. hotel revenue assumptions are summarized in Exhibit 7. The cash flows were projected out over 25 years and discounted back using the 16. and Cash Flows The NPV. Operating Expenses Operating expense information is summarized in Exhibits 3.09% cost of equity discussed in the previous section.

e. the value of this option is likely small. This point should be especially important should students find their calculations indicate the project would be a negative NPV or a below hurdle rate IRR. CONCLUSION Based on these calculations and methodology. For example. This would give Disney the opportunity to observe Universal’s undertaking and apply any benchmarks to their project. Students writing up this case should not only touch upon the points listed above. there should be significant value for Disney in waiting to make a decision on further hotel construction for this project. given Universal’s relatively poor track record at opening resorts. the students who review this case will most likely find that it is indeed a good business proposition for Disney to enter the Shanghai market. With the existence of one hotel in the original project. This would certainly reduce the uncertainty and risk associated with building more hotels at a later date. However. the hotel option should increase the value of the project. Disney has the opportunity to gauge the market. but should also delve into the unquantifiable benefits of expanding the Disney brand within China’s market. there are a variety of options to consider that could potentially add value to this project. More significant options probably include the following:    Build more hotels at a later date Build a ‘Downtown Disney’ entertainment center with shopping. Disney could wait on constructing a theme park in Shanghai until Universal Studios opens their operation.REAL OPTIONS Finally. i. Recommendations made could also include the following:    Begin negotiations with Chinese government o Government equity stake and debt provisions o Land and infrastructure provisions Disney must make the argument that a Shanghai Park would not substantially damage Hong Kong Escalating political tensions on the Korean peninsula could change the risk assessment 6 . Thus. Epcot Center in Orlando Specifically. restaurants and bars after the theme park has established operations Eventually increase the size of the park by adding another gate.