Description

Overview:

Oriental Land is exceedingly overpriced despite operating in the eye of the COVID-19 hurricane. ~70% of their cost structure is fixed and they are currently generating zero revenue. The Company operates Tokyo Disneyland and the adjacent Tokyo Disneysea. The Company derives ~83% of revenue from the theme park with the remainder mostly from nearby adjacent hotel operations. With the proliferation of COVID, Tokyo Disney shut down Feb 28 and was scheduled to re-open Mar 15. The park has yet to reopen and the earliest it will do so is now early May (and they will miss the crucial Golden Week holiday). For a variety of reasons, Japan was much later than other countries to engage in a lock-down (only ordered April 15) and they seem to be earlier in the outbreak than other Western countries so the risk of the lockdown being extended past early May are substantial. The sell-side seems to think it will reopen in May and is looking to 12% top line growth this CY. I think that’s absolute fantasy and look at US theme park operators and estimates here are for ~30% declines. Even if Oriental Land somehow sees revenue up 12%, the stock is trading at 50x PE. I think a more realistic scenario has the park basically closed for FQ1 and a sharp rebound leading to flat YoY performance for the remainder of the year) and net income of ~40Bn JPY v consensus of 93Bn which would place the stock at a 120x PE. Obviously the market will look past a temporary slowdown due to COVID but the stock is expensive even assuming the best of outcomes. The market just isn’t doing the math on the decrementals for a high fixed cost business like this going into their most important seasonal period and numbers are going to have to come down substantially. The stock is down 5% this year which is a complete outlier for any business with any sort of travel/entertainment exposure.

Company Background:

Founded in the 1960’s OLC’s initial goal was to develop the Urayusa Coast in Chiba Prefecture. In 1974 the Company reached an agreement with Disney to open a theme park, which then let to the opening of Tokyo Disneyland in 1983. Subsequently, OLC extended beyond the theme park into resort development, opening the Disney Ambassador Hotel and Ikspiari shopping/entertainment complex in 2000 and the Disney Resort Line monorail in 2001. It scaled up the resort with a second theme park, Tokyo DisneySea (TDS), in September 2001, along with the onsite Tokyo DisneySea Hotel MiraCosta. OLC has no capital or personnel ties with Disney Enterprises. Its operating license for Tokyo Disney Resort provides for yen denominated royalty payments ~7% of the theme park business revenue)

COVID Impact:

While too early to know exactly how the situation in Tokyo (and elsewhere) will evolve, we do know that countries like Germany and Ireland as well as states like CA are restricting mass gatherings through the fall. Tokyo Disney visitor levels were almost 40K/day prior to the recent shutdowns so by just about any measure, it’s a mass gathering. In Disney’s homebase of California, Governor Gavin Newsom has said “the prospect of mass gatherings is negligible at best until we get herd immunity and a vaccine)” and “large gatherings in June, July and August” were unlikely. It probably isn’t crazy to think a similar path might be in store for Tokyo Disney.

The Company recently reported FYE3/20 results and acknowledged they are reevaluating their medium term plan which called for record park visitors and OCF this FY (not a surprise). They are in the midst of a new expansion of Tokyo Disneyland and while they have 261Bn JPY of cash on hand so they have plenty of liquidity, the CF burn from a closed park is material.

Looking at their cost structure, it’s clear the vast majority is fixed or quasi fixed (call it 220Bn JPY/year) so while they do have sufficient liquidity (and access to capital) to continue to run, a 70/30 fixed/variable cost split is painful in the context of zero revenue.

Estimates vs consensus:

As mentioned, consensus continues to assume growth this year which seems incredibly optimistic to me and I think flat EPS v FY19 would be heroic. Assuming the lockdown continues through mid-summer and the Company lowers pricing to attract customers, I have EPS closer to 130JPY v 283JPY consensus which would put the stock at +100 P/E

Performance:

OLC has been an absolute outlier v peers down 5% YTD vs SIX and FUN which are down 60% and 46% respectively and even Japanese firms levered to leisure like Toho (down 22%) and HIS (down 57%).

Catalyst

Numbers will have to come down to account for COVID. Mass gatherings like theme parks will not snap back