Jake's View

Paltry profits for Hong Kong but a magic kingdom for Disney

Joint-venture deal struck over HK Disneyland harbours a financial mousetrap for the city

PUBLISHED : Thursday, 21 February, 2013, 12:00am
UPDATED : Thursday, 21 February, 2013, 6:07am

Seven years after opening, Hong Kong Disneyland has made a profit for the first time …

SCMP, February 19

Well, whoopee-doo! Here's to the real worth of a profit of HK$109 million on revenues of HK$4.3 billion and an investment of more than HK$20 billion after declared losses of HK$3.8 billion since 2008 and who knows how much more since the opening in 2005, but we won't ask.

Let us instead do as we are told and focus on the things that count - the warm smiles brought to the faces of millions by Mickey and Minnie Mouse and the HK$148 billion in economic benefits that our government continues to insist this venture has conferred on us.

I can't offer you an opinion on Mickey Mouse. I'm long out of kindergarten and no longer able to raise a grin off withered rats.

I can tell you, however, that the HK$148 billion is illusion, based on attendance numbers that were never reached, and an overly convenient discount rate in the net present value calculations.

But it is still possible, in fact I think likely, that Hong Kong Disneyland has been a success story … for the Walt Disney Company.

It all comes down to the deal we signed with Disney for the park. It gave Disney full management control and assigned it a big slug of the revenue before the money ever went to the joint venture's accounts.

For instance, Disney gets a royalty of 10 per cent of all admission revenues. That's straight up front, a direct payment to head office in California. I cannot tell you how much this actually came to last year as HK Disneyland is not a public company and only publishes a few select numbers. Admission is, however, the biggest category of revenues and we can safely assume a figure of over HK$100 million for this royalty payment.

Aside from the admissions royalty, Disney also collects a 10 per cent royalty on something called participants (your guess is as good as mine) and 5 per cent on sales of merchandise, food and beverage, and hotel revenues. Wrap them all together and my guess is that the minimum figure you would reach is HK$200 million.

Then we get a base management fee of 2 per cent. I assume this is 2 per cent of revenues and so here we have a further HK$86 million. In addition, there is a variable management fee of 2 to 8 per cent on ebitda - earnings before interest, tax, depreciation and amortisation. Ebitda came to HK$876 million last year and we shall assume a 5 per cent base case fee. We now have HK$43.8 million more for Disney.

Put it all together and I think we are looking at a payment to Disney of well over HK$300 million before the bare HK$109 million that the joint venture so proudly declared.

There could be more. If I were given full management rights to that park, the first thing I would do is set up a 100 per cent owned subsidiary called Park Purchasing Ltd and pass the merchandise sold at the park through this company first, adding a mark-up along the way.

I would call it a processing, administration and quality inspection fee and find no compelling reason to say a great deal about it to my partner, the Hong Kong government. I await Disney's assurances that nothing even remotely resembling this was ever done at Hong Kong Disneyland.

Let me make it plain that I think some of these charges in our agreement with Disney fully acceptable. Disney-branded merchandise is a 100 per cent Disney asset and there is no reason for the company to go equal shares with us on it. A management fee is also understandable … within reason.

But I think Disney's first bite out of that park's revenue is on the high side and I certainly regard it as unseemly for anyone in Disney's employ to make noises of self-congratulation on a meagre joint-venture profit when head office has for years tapped the park for much, much more.

Here's my idea. Our new chief executive is searching far and near for more land on which to build housing. I can find him 180 hectares on Lantau Island.