China property

Do China’s theme parks really hold the ticket to tourism dollars?

Evergrande is the latest developer to be piling into building theme parks, but is the country ready for this surfeit of large, expensive entertainment venues?

PUBLISHED : Sunday, 05 February, 2017, 3:27pm
UPDATED : Thursday, 09 February, 2017, 1:01pm

Chinese tycoon Hui Ka-yan, whose businesses span residential properties and football clubs, has become the latest developer to pile into building theme parks, aiming to stake out a piece of the country’s US$610 billion tourism industry.

Hui’s China Evergrande Group last month unveiled its 50 billion yuan (US$7.3 billion) Children’s World in the Hunan provincial capital of Changsha, the first of a string of theme parks across the country. His parks will use characters from China’s deep trove of myths, legends and literary masterpieces to populate their “children-oriented, all-indoor, all-season” playgrounds.

The park, aimed squarely at Walt Disney’s Shanghai Disneyland park and Comcast Corp’s Universal theme park in Beijing, is also built to impress, with a price tag that is 47 per cent more than the Magic Kingdom in China.

Evergrande’s ambitions do not end at Changsha, with similar parks planned for Guizhou’s provincial capital of Guiyang, Kaifeng in Henan, two more in Jiangsu province – within hours’ drive from Shanghai – and an Ocean Park in Qidong in Jiangsu province.

The surfeit of theme parks in China is raising questions as to whether Evergrande, whose financial leverage at 12.1 is double its closest industry peer, is making the appropriate strategic move.

“I don’t think Evergrande has any advantage running theme parks,” said Bocom International’s property analyst Philip Tse, who does not recommend investors buy the stock.

These were notoriously expensive to build and manage and required long payback periods because they needed three to four years to complete, which would have a negative effect on Evergrande’s highly leveraged financing, he said.

The Guangzhou-based developer currently owes more than 800 billion yuan in outstanding loans, with a debt-equity ratio exceeding 400 per cent at the end of June last year, the highest among the country’s major developers.

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Adding to the financial challenges, Evergrande did not own any trademark or intellectual property right over any superstar characters like Disney’s Mickey or Elsa the Snow Queen, which made it “very hard to make money”, Tse said.

Chinese developers have been shifting their focus towards theme parks since 2015 to diversify their business while grabbing the opportunities offered by the burgeoning demand for leisure travel.

The government predicts China’s US$610 billion tourism industry will double in value by 2020, spurred on by a still-growing middle class.

Dalian Wanda Group, the mall and cinema conglomerate owned by China’s wealthiest businessman Wang Jianlin, opened two of its Wanda Cultural Tourism City parks last year. He has an aggressive goal to build 15 large amusement venues by 2020, again with the theme parks of Disney and Comcast in his sight.

Shenzhen-based Kaisa Group and Shanghai’s Shimao Property Holdings have big leisure project plans, too, featuring themes from local animation and water parks to those featuring DreamWorks characters.

Most of these parks, including Evergrande’s, will be located in China’s smaller cities rather than in Beijing or Shanghai.

Zhang Hongwei, a research director at the Shanghai-based Tospur Real Estate Consulting, says demand for leisure and entertainment venues in Chinese lower-tier cities with large populations is growing fast.

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A common thread of the planned entertainment sites by the majors was that apartments were to be built on or near the sites, too, to help cover the park’s construction cost, he added.

Theme parks could also be the key attraction for raising the price of residential property nearby, providing an added impetus for Evergrande, said David Hong, head of research at China Real Estate Information Corp.

A prime example is the planned Children’s World for Qidong (啟東), which just happens to have Evergrande’s mega housing project, Sea Venice, being built nearby.

Evergrande last year became China’s largest property developer by sales, but the company barely made a profit after huge borrowing and losses in some of its non-core businesses.

The property giant has now expanded into all kinds of business from solar panels, pig farming, mineral water, grain and oil to plastic surgery and the financial sector.

Ronald Merriman, managing director of MRProfun China, a consultancy that specialises in the theme park sector, said the key for developers succeeding in running a site in lower-tier Chinese cities would be to focus solely on developing attractions that were targeted at local residents and that they should certainly not be “one-size-fits-all” tourist-focused products.

Tse worried, however, the country was already nearing theme park saturation point in the second- and third-tier cities, given that not only real estate firms, but international and local park operators were still eyeing new sites.

A stark warning came recently from the BBT Commercial Research Institute, which estimated in a report that of the roughly 2,700 theme parks in China, just 10 per cent were profitable.

Last year, Wanda closed its seven billion yuan Wuhan movie theme park after just 18 months because of poor visitor numbers.