Oriental Land Co. Ltd (OTCPK:OLCLF) is the operator of Tokyo Disney Resort, which comprises Tokyo Disneyland and Tokyo DisneySea, under the company’s theme park segment (its largest contributor accounting for 83.2% of total revenue in FY2019). Oriental Land also operates eight hotels, three of which are Disney hotels under its hotel business segment (accounting for 13.8% of total revenue in FY2019). It also has its other business segment, which operates a commercial complex and monorail line servicing Tokyo Disney Resort (accounting for 3% of total revenue in FY2019). At its closing price of JPY14,170 on 19 March 2020, Oriental Land trades at a P/E of 57x on FY 31 March 2019 profit (FY 2019 profit of JPY90,286 million or USD822m), forward P/E of 67.5x (forecast FY2020 profit of JPY76,240m), and Price to Book of 5.41x; on a variety of metrics its valuation appears pricey. For the purpose of this article, references are to its primary Tokyo listing.
This high valuation premium in normal times can be explained by a variety of factors, such as its iconic business with Tokyo Disney Resort being one of the best theme parks in the world, its business moat, record high attendances last year, relatively stable long-term business performance, clean balance sheet, as well as characteristics of the Japan stock market. However, with the current impact from the COVID-19 outbreak (Tokyo Disney Resort has been closed since 29 February 2020 until at least early April and visitors were down significantly prior in February), the domestic economic contraction in Japan, an impending ticket price hike for Tokyo Disney which will be the largest in many years, and potential for tail risk to the Japan market in the coming months (that I have described in a previous article), there is a confluence of factors which will likely significantly impact the operating performance of the company over the next few months at least. Curiously though, Oriental Land is up from its price at the start of February of JPY14,015, by 1% as at 19 March 2020, whilst other theme park owners globally have seen a massive share price collapse, and Oriental Land’s operating environment sees an adverse deviation from its long-term norm. Therein, I do not view Oriental Land as a buy at current levels, viewing that it needs to rerate to a lower fair value to reflect the ongoing adverse operating environment. At the same time, Oriental Land has a relatively concentrated and likely sticky long-term shareholder base, and stock purchases by both the Japan Pension Fund, the Bank of Japan’s large ETF buying program, and other investors amidst Japan’s market correction, might be mitigating some of the near-term stock price downside and providing price support. Ultimately, I expect significant daily price moves in Oriental Land but the trend ultimately to the downside as the price re-rates to a lower fair value to reflect the ongoing adverse operating environment.
Tokyo Disney Resort
Opened in 1983 as the first Disneyland outside US, Tokyo Disney Resort is an iconic and highly recognized theme park in the Japan market and the only Disney Resort that Disney does not own or have a shareholding in (but has creative control over). Oriental Land owns significant real estate, owning 500 acres of land on which Tokyo Disney Resort operates with good accessibility to Central Tokyo. I do like that the company owns significant tangible assets with its real estate holding, albeit it’s trading at a valuation of 5.31x price to book. Oriental Land also has a clean balance sheet with a net cash position of JPY260.6billion, about 5% of its current market cap.
In FY ending March 2019, 83.2% of net sales and 83.1% of net profit was derived from its theme park segment, 13.8% of net sales and 14.9% of its operating profit was derived from its hotel business segment and 3% of net sales and 2% of operating profit from its other business segment.
Source: Company presentation
Tokyo Disney Resort is largely a domestic oriented business. In FY 2019, guests from the Kanto region (includes the Greater Tokyo Area and encompassing seven prefectures) of Japan accounted for 60.8% of visitor numbers, whilst Japan in total accounted for 90.4% of visitors. Visitors from overseas, meanwhile, accounted for 9.6% of visitors, and whilst small, has grown significantly from 3.9% in 2013.
Source: Company annual report
Long-term performance reflects a steady long-term growth in sales and profit. Five year financial summary of Oriental Land is as follows:
Source: Company website
In January, the company announced plans to raise its ticket price effective 1 April 2020 for one-day passports for adults by ¥700, to ¥8,200, from ¥7,500, representing a 9.3% increase. As shown in the following table, there have been a total of 3 ticket price rises for Tokyo Disney in the past decade; two of these increases (2012: price increase +6.9% and 2016: +7.81%) saw declines in attendances in those years (2012: -0.08% and 2016:-3.79%) whilst the other ticket price increase (2015: +3.23%) saw a marginal increase in attendance numbers (+0.26%). Overall, the 5 and 10 year average YoY growth in attendance numbers has been 0.87% and 1.97% respectively. Therein, whilst there are other factors that also affect attendance numbers, it can be drawn that there is a degree of impact of price increases to attendance numbers, albeit modest. The coming price increase of 9.3% is the largest increase yet and was originally planned to take effect on 1 April 2020. Given the unprecedented confluence of the COVID-19 outbreak and a prior ongoing economic contraction in Japan, it is unclear if there will be the same degree of relative price inelasticity in attendance numbers to this price hike when Tokyo Disney Resort reopens.
Source: Company website
The typical visit to Tokyo Disney is a day-long outing; average length of visit is 8.9 hours in FY 31 March 2019.
Source: Company annual report
Impact of Covid-19 outbreak to theme parks globally and Tokyo Disney Resort
The Covid-19 outbreak is having a major impact on theme parks globally, with major theme parks globally closing amidst the outbreak, and Tokyo Disney Resort is no exception. With its current closure since 29 February until early April (and uncertain whether this will be extended again further), it will be more than a month of zero revenue whilst still incurring most of the operating costs (such as staff pay, property and maintenance). The disruption to Tokyo Disney Resort’s business operations are likely to be for months ahead, whether from closure or significantly lower visitor numbers. It does seem like the closure of Tokyo Disney Resort might be extended further beyond the current early April date or in any case that there will be low visitor numbers if it does reopen in April; Oriental Land has recently extended the validity period of its complimentary visit pass for shareholders’ last entitlement, from 30 June 2020 to September 30 2020, perhaps in anticipation of an extended closure (although some theme parks in Japan are planning to reopen partially and possible that Tokyo Disney does too) or low attendances when it reopens as visitors push forward any visit plans. Given that the typical visitor outing to Tokyo Disney World and theme parks generally is a day long outing compared to other shorter duration entertainment options, there is likely to be continuing apprehension of going to theme parks until there is a containment of COVID-19; this business disruption may be unlike any other of past that Oriental Land has experienced (global financial crisis, Fukushima nuclear disaster), where due to a potential protracted nature of the outbreak and caution even after it is contained, visitors levels do not see a quick return to normal levels in a matter of months.
Stock price is higher while other theme park operators globally are crashing
With the theme park closures globally, theme park stocks around the world have seen massive declines from their levels at the start of February; US theme park stocks such as Cedar Fair Entertainment (-53%), Six Flags (-64%), SeaWorld Parks (-62%), have all crashed from their levels at the start of February 2020 (however these names are significant smaller than Oriental Land and have significant amounts of leverage vs Oriental Land’s net cash position). Clearly, Oriental Land too will see a significant impact in operating performance, in its Q4 of FY2020 end 31 March 2020 and stretching into FY2021. However, with Oriental Land’s net cash position, there are not the financial standing challenges that many other businesses with fixed overheads and major business disruption that are leveraged such as other theme parks, airlines or travel companies globally are facing. Oriental Land’s stock price since the start of February is actually higher by 1% (as of 19 March).
A possible better international comparable to Oriental Land, may be The Walt Disney Company (NYSE:DIS), which derived 45.4% of its operating income in FY2019 from its “parks, experiences and products segment” (having the majority of its business from media networks segment). Disney’s stock price is down 37.5% since 1 February 2020 (as at 18 March 2020), and it trades at an estimated 18.9x price to earnings. Its parks, experiences and products segment had an operating income margin of 25.7%, with operating income of USD6.758billion in FY 28 September 2019. Oriental Land in comparison, had an operating income margin of 24.6% in FY 31 March 2019, with operating income of JPY129,278million (USD1.186billion). The profit margins therefore are potentially comparable between Oriental Land and Disney. How much of a P/E ratio might be ascribed to Disney’s parks business segment, when Disney’s P/E is at 18.9x? Disney’s media networks segment business that contributes more operating income than the parks, experiences and products segment, had a higher operating income margin of 30.1%, with operating income of USD7.479billion in FY 30 September 2019. Therein, assume we are generous to Disney’s theme park segment and ascribe it a 50% premium to Disney’s current P/E ratio, giving the theme parks segment a P/E of 28.3x. Assigning a similar P/E to Oriental Land and basing it on its past FY 2019 profit (when it enjoyed record attendances) would equate to JPY2.55trillion in market cap, or JPY7,025 per share, vs the current JPY14,170 share price. Therein, what might be other factors for the valuation multiple currently commanded by Oriental Land, whilst the broader market has plunged?
Oriental Land’s shareholder base, the market impact of the Bank of Japan and unique characteristics of the Japan market
Part of the reasons for Oriental Land’s price strength in spite of its ongoing closure of Tokyo Disney Resort, might be due to unique characteristics to Japan’s market and Oriental Land, which concurrently are mitigating price downside to the stock.
A look at the shareholding base of Oriental Land from its last annual report shows as follows:
Source: Company annual report
Source: Company annual report
Based on the composition of stockholders as at the last annual report, the composition type of shareholders does not appear to have varied significantly over the years. Foreign corporations and individuals makes up 11.55% of the shareholding as at the last annual report, therein domestic shareholders total 88.45%. The foreign shareholder composition is significantly smaller than the broader Topix index that Oriental Land is part of, which had about 30% foreign shareholding as at last year. Much of these domestic shareholders of Oriental Land are likely to be long-term holders, e.g. there is stickiness in the shareholder base who may maintain shareholdings or perhaps even buy during the challenging market conditions currently experienced. At the time of the last annual report, the top ten shareholders of Oriental Land comprise a total of 49.77% of the company shareholding. The top ten shareholders are “Japan Inc“; the term for the Japan private sector and government and their close relationship. Keisei Electric is a major private railway company in Chiba and Tokyo, with its railway line including connection from Narita to Tokyo. Mitsui Fudosan is a major real estate developer and part of Mitsui Group, a mega conglomerate in Japan. Chiba Prefecture is a prefecture of Japan located in the Kanto region. These major decades-long shareholders are also long-time stakeholders in Tokyo Disney; Keisei Electric from the train connectivity, Mitsui Fudosan participated in the founding of Oriental Land and the land for Oriental Land’s development of Tokyo Disney was from Chiba Prefecture. There are also seven Japanese trust banks among the top ten shareholders, totaling 14.36% shareholding. Presumably, some of this shareholding held by the seven trust banks is held for the Japan Pension Fund or the Bank of Japan via its ETF buying (that will describe further subsequently) which hold their holdings in trust banks. 21.07% of the shareholding is held by domestic individuals and others. Oriental Land does have significant appeal to individual shareholders in Japan, from both its long term resilient company performance and wide recognition of its iconic business, as well as its dividend, and gifts distributed twice annually to shareholders. Unique to Japan, are the gifts (known as “Yutai“) that listed companies (an estimated more than one third of listed companies in Japan) provide to shareholders in Japan (a local address is required for delivery of the Yutai). For companies, Yutai encourages a long-term sticky domestic shareholder base of individual investors, whilst for “Mrs. Watanabe“ it does have meaningful appeal to be earning a dividend yield plus gift benefit vs next to nothing from money in the bank. Oriental Land does rank highly in its “Yutai”; offering 1 one-day passport ticket to Tokyo Disneyland or Tokyo DisneySea each March for 100 shares held, and another distribution of one-day ticket each September for 400 shares held. The record date for the March distribution is 31 March 2020; generally, stocks with Yutai may see a drop after the distribution record date as some shareholders buy the stock for the Yutai distribution. There are also extra tickets for long-term holders of the stock that do not sell their shares; holders of 100 shares or more from September 30, 2018 to September 30, 2023 will additionally receive 4 one-day pass tickets in December 2023.
The Bank of Japan’s ETF purchase program and its potential market impact in share price support
The central bank Bank of Japan has a (one of a kind among central banks) ETF purchase program, established in 2010 and which accelerated in April 2013 as part of Abenomics and the current BOJ Governor Haruhiko Kuroda’s appointment; Governor Kuroda enthusiastically increasing the program massively since, with a recent doubling of its annual purchasing target to ¥12tn ($112bn) amidst the global market sell-off and last Thursday the BOJ purchased a record JPY200.4billion in ETFs on the day. BOJ’s ETF buying has the stated objective of boosting market confidence and stimulating consumer and business spending for inflation targets, although it has been criticized for distorting the market prices. The BOJ purchase program covers ETFs that track the TOPIX (which Oriental Land is part of), the Nikkei 225 Stock Average, and the JPX-Nikkei 400, and proportionately based on the three indexes market capitalization of which Topix is largest. With the market sell-off since last month, the BOJ is sitting on significant unrealized losses on its ETF position, and potentially on further declines its net worth would be negative, although a negative net worth may not necessarily have any major economic consequence, except to the credibility of the BOJ. Therein, the BOJ’s doubling down on ETF purchases can be expected to continue, potentially to buy itself out of its on-paper losses; whether with the adverse economic fundamentals and significant market tail risk this is successful, is uncertain. Recent BOJ and pension fund buying of domestic equities may also be driving buying by domestic institutions and investors with the expectation of market price support from the BOJ’s buying. This current buying by these domestic investors, might be skewed towards stocks such as Oriental Land, as is the equities allocation during normal market conditions; being a large cap index stock with an iconic business and long-term resilient business performance (non-cyclical, growth), therein its stock price strength and commanding a significant premium in valuation multiple (vs. cyclicals and value stocks in Japan which have seen significant declines in the market sell-off). There is likely also an expectation that when the COVID-19 outbreak is ultimately contained, Tokyo Disney will quickly resume its consistent growth in attendances and financial performance.
Therein, the price strength and high valuation multiple of Oriental Land is potentially a result of the various above described factors, notwithstanding the current closure of its business and significant impact to its financial performance in the months ahead.
Oriental Land as owner and operator of a highly-recognized and iconic business, Tokyo Disney Resort, has long commanded a premium valuation for a variety of reasons, including its resilient business performance and status as a non-cyclical index behemoth with long-term steady growth. The current outlook for the business though is seeing an unprecedented adverse impact presently and for the coming months, from its long-term norms. However, the price has not reflected this, amidst a variety of described reasons. Mitigants to price downside will be ongoing and significant intra-day price moves will likely continue. However, I view ultimately downside price risk to the stock to reflect a lower valuation premium and fair value reflecting the ongoing adverse market and business conditions that will persist for months ahead, notwithstanding in the long run it will return to its long-term resilient performance when business conditions ultimately return to a normalcy.
Photo source: Japan Guide
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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