Thursday, March 2, 2017

Hong Kong Disneyland Expansion is Far to Be a Done Deal, and Here is Why

Remember when Disney announced the expansion and all the new attractions coming to Hong Kong Disneyland - including a new castle, a Frozen land a a big Marvel area in Tomorrowland  - last November, and how exciting you were? Well, not so fast as it's far to be done deal. All this would come at a cost of HK$10 Billion and because Disney owns only 47% of HKDL and the Hong Kong Government 57%, it means that Hong Kong tax payers will pay 57% of this HK$10 Billion amount and Hong Kong lawmakers are outraged about this, specially because the expansion comes after the park’s first descent into the red in five years and large-scale layoffs earlier this year. HKDL lost a total of HK$148 million last year, while the number of visitors dropped 9.3 per cent. Let's have a look at all this in more details with excerpts below of SCMP articles and renderings of the proposed expansion, which are in big size so they may take some time to appear on the page.

"Even before the world’s smallest Disneyland officially opened in Hong Kong on September 12, 2005, there were plans for the theme park to eventually expand. After 11 years of operation, a major new facelift has been announced. While the need for further development is beyond doubt, the question is how to go about it. With a price tag of HK$10.9 billion – more than half of which is to come from the public coffers – taxpayers have to be fully convinced that the investment will be worthwhile.

The figures provided by Disney and the government appear to be reassuring. The number of attractions will increase from 110 to 130 between 2018 and 2023. Visitor numbers are expected to grow from 6.8 million last year to 9.5 million by 2025. Up to 8,000 jobs will be created across the tourism industry following the upgrade. The total economic benefit could reach HK$41.6 billion over a 40-year period.

Only time will tell whether the numbers are correct. If history is any guide, officials tend to be overly optimistic. During the early years, the theme park was struggling to meet some its business targets. It fell into the red again earlier this year, and some staff had to be laid off. The future is further clouded by competition from its Shanghai counterpart, which has just announced an ambitious expansion plan of its own just months after its opening in June. Its impact and that of other theme parks in the region on Hong Kong Disneyland cannot be ignored.

As the major shareholder in the venture, the government has a role to play in the expansion. But the public is also entitled to ask whether there are alternative financial arrangements. In the previous expansion, the government contributed its part through converting an old loan into equity in Hong Kong Disneyland, effectively sparing taxpayers from committing new capital. This time, the government is to ask the Legislative Council to approve an injection of HK$5.8 billion.

The funding request will no doubt be carefully scrutinised by Legco. This is, after all, the constitutional duty of lawmakers. While officials can expect a tough sell, it should not become ammunition for filibustering in the legislature."

"Commerce Minister Greg So Kam-leung played down concerns about the difficulty in securing funding from a deeply divided legislature, insisting it was “the right time” to expand for the sake of long-term tourism development. So urged lawmakers to look at the “big ­picture” and approve the spending of public money. The capital injection by the government for the expansion and development plan will be capped at HK$5.8 billion,” he said. “[Disney] is confident that the works will be completed within budget.”

Disney will brief lawmakers on Monday in an attempt to lobby enough support for the funding. Holden Chow Ho-ding, vice-chairman of the pro-establishment DAB party expressed support for the expansion, ­expecting it to attract more ­tourists to the city, but the pan-democrats raised concerns.

“The attractiveness of the park is not as good as before, and it will face competition with Shanghai opening a new Disney Park. Its competitiveness is lower than Ocean Park,” lawmaker Wu Chi-wai said, doubting whether new attractions would improve the park’s operational situation. The Civic Party’s Alvin Yeung Ngok-kiu was concerned that ­Disneyland might feel the pressure to increase its admission fees in the future, resulting in fewer ­locals visiting the park."

As you see, lot of debates about HKDL expansion and considering the amount to be spent it's understandable. Some like Peter Kamerrer - full article HERE - are going as far as saying that "it’s time that the government admitted the venture is a failure, and put the precious land it occupies to better use" and ask to "scrap loss-making Hong Kong Disneyland and put public housing on the site instead":

"Not only has it turned a profit only three times in its 12 years, but falling attendance numbers also seem to indicate it’s not going back into the black any time soon. Logic says that, given the theme park takes up 126 hectares and Hong Kong’s severe housing shortage is due to a lack of useable land, the natural conclusion is that it should be knocked down to make way for public flats. 

This is an idea that has also been floated for the Hong Kong Golf Club at Fanling, which has an area of 170 hectares. Hong Kong could build housing for 120,000 people in such as space, using a calculation of 705 people per hectare. The Disneyland site could provide for a further 89,000. The combined figure of 209,000 is a good chunk of the one million people the government has projected will need somewhere to live in the coming three decades. Most pressing is reducing the average four-year-and-eight-month wait for applicants for public housing."Most pressing is reducing the average four-year-and-eight-month wait for applicants for public housing."

But the situation is now getting worse in Hong Kong as the "City wants a new deal with Disney because Hong Kong Disneyland sends billions of dollars back to US parent company while reporting losses - Hong Kong Lawmakers told that HKDL needs to pay between 5 and 10 per cent of its revenue to its US parent as royalties every year, meaning a possible HK$3.37 billion since 2009"

"The government – the biggest shareholder in Hong Kong Disneyland – has been urged to renegotiate what critics call an “unfair treaty” with Walt Disney after it was revealed for the first time that the theme park needs to pay between 5 and 10 per cent of its revenue to its American parent as royalties every year. This means the Lantau-based park could have paid between HK$1.68 and HK$3.37 billion to the California-based conglomerate since it started releasing financial figures in 2009, the Post has calculated – despite recording losses in eight of its 11 years.

The Hong Kong government, which holds 53 per cent of the park’s shares, was pressed by lawmakers last month to disclose details of its financial agreement with Walt Disney – especially the amount of royalties and management fees paid. The request was made as part of a government bid to obtain approval for a HK$5.8 billion funding application for a six-year expansion project at the park.

“The royalty rate charged by the Walt Disney Company on Disney resorts outside the United States is largely the same at 5 to 10 per cent of revenues,” according to a Legislative Council paper submitted by the government. Tourism Commissioner Cathy Chu Man-ling told members of Legco’s economic development panel on Monday that the terms the city got were not “inferior” to those for Disney resorts elsewhere.

According to a report by Reuters in 2015, about 10 per cent of annual revenue from Paris Disneyland’s operator is taken up by such fees, while the figure for Tokyo Disneyland was 7 per cent. Simon Lee Siu-po, assistant dean of undergraduate studies at Chinese University’s business school, said the amount was “reasonable”, but the government could have been in a stronger position when negotiating the deal in the first place.

However, some lawmakers were not convinced. They passed a non-binding motion put forward by Michael Tien Puk-sun, a pro-estabilishment member who threatened to veto the park’s funding application if better terms were not guaranteed. The motion urged the government to renegotiate its financial arrangements with Walt Disney, including the possibility of exempting management fees and royalties for an appropriate period, as well as excluding interest, tax, depreciation and amortisation in calculating the fees. Tien said the motion was meant to improve the financial position of the park and was in the best interests of taxpayers."

As you can see, the HKDL expansion is far to be a done deal and i have the feeling that HK lawmakers won't give any approval before Disney accepts to reduce its royalties fee. For sure D&M will follow the case and will let you know what happen at the end in a near future!

Original full articles of the South China Morning Post are HERE, HERE and HERE.

Pictures: copyright Disney


Brandon said...

This is very disappointing news. I think the expansion along with the new hotel soon to open will really make a profitable and world class park. The elements are certainly there. I can't imagine that a demolition and subsequent housing would be a better financial decision! If anything, tearing down the Ocean Park would make more sense, as that park is a disaster with horribly aging attractions and little to offer visitors to Hong Kong! Space has always been a problem, but this idea is absurd to tear down what will be a treasured part of the Hong Kong community for a very little housing! I think giving Disney a chance to build the park they envisioned will pay off three fold. Especially since, like at CA Adventure, the park was built on a slim budget. The remodel of Ca Ad, really paid off, and I think the same is possible for Hong Kong if given the chance, especially since now that it is maturing to an age where new generations will want to visit!

Allan said...

I believe the deal will be done after Disney concedes a little on royalties. Maybe Disney will say they will put the royalties into the expansion fund or something. But I also think the legislators will ask and Disney will accept that this is the last time HKDL come to the govt for expansion funding.

Brandon said...

Not that we're talking about small amounts of money but it should also be noted that the money being invested is about equivalent to 1.5 billion in us or euro dollars! Hardly out of the question for a project this size!