Investments and Finance of Hong Kong Disneyland

In 1999, Hong Kong experienced the financial turmoil. Followed by 2003, it was hit again by SARS and its economy deterioration. The government of the Hong Kong Special Administrative Region (HKSAR) needed an invigorating project to revive economical confidence. On November 2nd, 1999, the two parties of The Walt Disney Company (WDC) and HKSAR government signed the agreement of joint investment and building the construction of Hong Kong Disneyland (HKDL) project (Hong Kong Disneyland, 2017). As a major family travel destination, HKDL has continuously brought substantial economic benefits to Hong Kong.

According to the survey data of the Hong Kong Tourism Board and the operation of the HKDL, the additional consumption of park visitors in the financial year of 2015 (FY2015) amounted to $ 18.8 billion HKD (Hong Kong Tourism Board, 2018; Hong Kong Disneyland, 2017). Taking into account the direct and indirect value added of park visitors in excess spending in Hong Kong, HKDL has contributed about a total of $ 9.3 billion HKD in added value to Hong Kong economy in FY2015, equivalent to 0.42% of GDP and created 20,900 jobs (Hong Kong Disneyland, 2017). In the first 10 years of operation of the park, a total of $ 74.4 billion HKD in value added to Hong Kong's economy was realized, equivalent to 0.38% of the Gross Domestic Product. During the same period, a total of 195,500 jobs were created, creating many job opportunities for front-line workers and the tourism industry in Hong Kong (Hong Kong Tourism Commission, 2016). Investment In order to gain the access of Disneyland in Hong Kong, the HKSAR government has accepted the harsh conditions from WDC including that HKSAR as a major investor of funds who must be responsible for construction. According to the cooperation agreement, the HKSAR government will associate with WDC to establish a company named the Hong Kong International Theme Park Ltd (HKITP), and build a world-class international theme park and a resort hotel in the near Hong Kong International Airport at Penny Bay on Lantau Island (Hong Kong Disneyland, 2017). The total investment of HKDL was $14.1 billion Hong Kong Dollar (HKD), applying the usage of lending and capital injection as hybrid financing arrangements. Among them, WDC invested $2.45 billion HKD, holding 43% stake in the theme park company; and the HKSAR government invested $3.25 billion HKD, accounting for 57% of the shares (Hong Kong Legislative Council, 2005).

In addition, of the $8.4 billion HKD loans, $2.3 billion HKD came from bank commercial lending. In mid-2008, WDC paid the due loans for Hong Kong Disneyland. Moreover, the other $6.1 billion HKD loans were repayable within 25 years of the opening (Hong Kong Legislative Council, 2005). Financing The establishment of HKDL is hugely costly. To successfully complete this project, the HKSAR Government and WDC have made painstaking efforts in the elaboration of such trading elements as equity, financing, land and logistics infrastructure (Hong Kong Legislative Council, 2005). Ownership Structure Hong Kong International Theme Parks Limited (HKITP), a joint venture between the HKSAR Government and WDC, is responsible for the construction and operation of the HKDL theme park. Both parties agree that if third-party investors are interested in HKITP in the future, the HKSAR government and WDC may sell their shares. However, WDC owns a minimum of $1.9 billion HKD shares, while the HKSAR government is not subject to the minimum shareholding requirements after the theme park is opened (Henderson, 2008).

Construction Expenses

The cost of constructing the HKDL theme park is estimated to be $ 14.1 billion HKD. In addition to the capital of $5.7 billion HKD, a further $8.4 billion HKD loan is required to achieve the optimal capital structure of "Liabilities / Net Assets" 6: 4. The $8.4 billion debts included a total of $6.1 billion government loans, a 25-year repayment of interest and a commercial loan of $2.3 billion HKD (Economic Analysis and Business Facilitation Unit, Hong Kong Financial Secretary’s Office, 2017). Land Cost HKDL theme park covers an area of 126 hectares, costing $40 billion HKD land development including land reclamation and land leveling (Hong Kong Disneyland, 2017).

According to revenue projections, HKITP cannot pay the fees in cash, otherwise, from the investors' point of view, the expected rate of return on equity will be greatly reduced and the reasonable return will not be achieved, resulting in HKITP being unable to raise funds on a commercial basis (Hong Kong Legislative Council, 2005). Therefore, both shareholders agreed that the HKSAR government should inject HK $ 4 billion from HKITP as an attached capital to the land for Phase I of the theme park. Subsidiary capitalization can be converted into common shares of the company when the performance of HKITP is satisfactory, but the conversion can only begin after HKDL has been activated for five years. To avoid excessively affecting the value of shares of other shareholders, the conversion ceiling will increase by 5% each year. The maximum conversion amount must not exceed 10%, that is to say, if the conversion of all the subsidiary shares is completed at least 25 years after the opening of HKDL theme park(Hong Kong Legislative Council, 2005).

According to the agreement, the title deed of Phase I of Theme Park is 50 years and HKITP has 50 years of renewal rights. In addition, HKITP reserves the right to buy Phase II land for HK $ 2.8 billion (1999 land price, adjusted for inflation). The option is valid for 20 years (Hong Kong Legislative Council, 2005). Logistics Infrastructure To support the construction of HKDL theme park, the HKSAR government also invested $13.6 billion HKD in infrastructural projects around the theme park, including surrounding roads, piers, public transport, police posts, fire stations, drainage and sewerage facilities, and land leveling. The expenditure is substantial and the Hong Kong SAR government said that since the piece of land has long been planned for tourism and recreational purposes, most of the infrastructure projects need to be undertaken even without a theme park.

The profound economic and social influences and benefits to Hong Kong from building HKDL theme park are hard to quantify. With a total investment of about $30 billion HKD under the private sector capital operation, the project will be out of reach for the rest of the years (Hong Kong Legislative Council, 2005). In order to achieve commercialization, the HKSAR government has worked hard on the design of the transaction structure.

First, only the construction costs are listed as project expenditures to ensure that the project yields are higher than those of general infrastructure projects such as investment in airports or railways. Secondly, the debt ratio determines the amount of equity investment, and the government provides low-interest loans to avoid the dilemma of over-expenditure of finance. Finally, the "maturity and equity swap" arrangement is adapted to share the maturity benefits of the project and exit timely. On the other hand, WDC has a 43% interest in a total investment of approximately $30 billion HKD solely for a consideration of $2.45 billion HKD, excluding the fees charged by HKITP (Hong Kong Legislative Council, 2005). The strength of WDC in the trading structure is obvious. Long-term Analysis (1)Past Operation (the Year of 2016) Figure 1. Hong Kong Disneyland Annual Business Review for the Fiscal Year 2016(Hong Kong Disneyland, 2017)The revenue of HKDL comes mainly from sales of admission tickets to theme parks, merchandise sales, and catering services at parks and hotels, and rental of hotel accommodation. In the financial year of 2016, the total revenue of HKDL is $4.75 billion HKD, decreasing by 7% or $364 million HKD less than in the previous fiscal year, which reflected the decline in the number of visitors to the park and the impact of the number of weeks in the financial year.

Excluding the impact of the number of weeks in the financial year, the income decreased by 5% (Hong Kong Disneyland, 2017). The operating costs and expenses of HKDL mainly include salaries, operating expenses, sales costs, and marketing costs. The operating costs and expenses for the financial year of 2016 are $4,035 million HKD with a decrease of 6% or HK $274 million HKD compared with the previous fiscal year, which was mainly due to efficiency and cost management measures and cost savings, as well as favorable factors affecting the number of weeks in the financial year. Depreciation and amortization for the current financial year was $890 million HKD, by a 7% or $66 million HKD lower than in the previous financial year. This is mainly due to the fact that some of the assets with a 10-year serviceable life have been fully depreciated in the current financial year (Hong Kong Disneyland, 2017). Non-current assets mainly include property, machinery and equipment, rental land and in construction projects. At the end of the fiscal year, Non-current assets amounted to $18,788 million HKD, an increase of 12% or $2,081 million HKD compared with the previous fiscal year. Current assets include cash and cash equivalents, accounts receivable and other accounts receivable and inventories. Current assets increased from $1,556 million HKD to $1,869 million in fiscal 2016 (Hong Kong Disneyland, 2017). The financial liability includes the payment of the sum and other payables and deferred income. The current financial liability at the end of this financial year 2016 is $1,951 million HKD, an increase of 9% or $169 million HKD in the previous financial year.

Non-current liabilities include long-term loans and retirement benefit scheme liabilities. The balance is mainly unsecured long-term loans provided by the HKSAR Government and WDC to HKDL. Loans will be repaid in installments to the fiscal year 2025. Non-current liabilities at the end of the financial year 2016 were $1,983 million HKD, an increase of 49% or $656 million HKD over the previous financial year of 2015 (Hong Kong Disneyland, 2017). (2)Future Operation (from 2018 to 2023) On November 22nd, 2017, the HKSAR government announced that it had reached an agreement in principle with on the expansion and development plan of the HKDL.

The further expansion of the site in the first phase of the park will provide more popular facilities for local and overseas visitors and enhance the competitiveness of the park. And increasing the attractiveness of Hong Kong as a tourist destination of choice. The total cost of the expansion is expected to be $10.9 billion HKD. The expansion and development programme will start from 2018 to 2023, during this period new tourist attractions will be introduced almost every year (Hong Kong Tourism Commission, 2016). Upon the completion of the expansion and development project, the number of parks will be increased from seven to nine. The total items will increase from about 110 to more than 130. HKDL expects the new project to create about 3,500 jobs. Upon the completion of the scheme, an additional 600 equivalent full-time jobs will be created in the park.

The scheme is expected to create about 5,000 jobs in Hong Kong as a whole. In addition, the expansion and development programme will be based on a 40-year operational period. It is expected to bring Hong Kong an additional net economic value of $38.1 billion HKD to $41.6 billion HKD (Hong Kong Tourism Commission, 2016). It is seen that the initial investment of WDC in HKDL cost only $2.45 billion HKD, while the HKSAR government, besides investing in HKDL, spent the huge amount of $24.45 billion HKD on the related transport construction, reclamation, and environmental arrangements. The cost ratio is about 1: 9, but the stake is 43: 57, or nearly 1: 1. On the surface of perceptual intuition, the HKSAR government seems to be at a loss. However, Disney 50's brand image and sales experience cannot be estimated by a certain amount of money, so the overall economic perspective is still appropriate and reasonable. And it is can also be regarded as a win-win situation. Because for WDC, this can avoid borrowing risk and avoid high-interest pressure. Meanwhile, the operating risk is reduced if there is any business difficulty. Moreover if necessary, WDC can also use government resources for support, which is not ordinary private enterprises could do. From the Government's side, the setting of HDKL can solve the serious unemployment problem in Hong Kong helping to stabilize society, promote the economy, promote local tourism and increase economic income as well. Shanghai Disneyland opened on June 16th, 2016, and it is three times the size of HKDL.

Therefore it is widely believed that HKDL is facing a bigger challenge (China Daily, 2016). Before HKDL was prized mostly due to mainland visitors. In 2015, mainland China saw a 2.5 percent drop in visitors to Hong Kong, and HKDL losses were part of the dilemma of Hong Kong's entire tourism industry (Reuters, 2016). With regard to the profit and loss changes of HKDL in the overall tourism situation in Hong Kong, the public should adopt a common mind. From the perspective of Hong Kong, it is suggested to try the best to promote the diversification of Hong Kong's tourism resources. It is wise not to put all the eggs in a basket of mainland tourists. As the mainland China is also developing various domestic tourist facilities rapidly. Alternative tourism projects in Hong Kong are mostly inevitable in the long run. The role of Shanghai Disneyland in diverting mainland visitors from Hong Kong Disneyland cannot be ignored.