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Oriental Land's Disney Parks
May Be Running Out of Dreams

May 17th, 2005

Oriental Land's Disney Parks May Be Running Out of Dreams


TOKYO -- For more than two decades, the Japanese operator of Tokyo's Disney theme park has been on a thrilling trip around Cash Mountain. Now there are some signs the ride might be slowing down.

Oriental Land Co. owns and runs a pair of parks: Tokyo Disneyland and, since 2001, Tokyo Disney Sea, just outside Japan's capital. It pays royalties totaling about 7% of its unconsolidated revenue to Walt Disney Co., the Burbank, California, entertainment company.

For the fiscal year that ended March 31, Oriental Land's unconsolidated revenue was 271 billion yen, or $2.52 billion, down 2% from the previous year. Walt Disney isn't a shareholder in Oriental Land, which is 23% owned by Keisei Electric Railway Co.

Over the years, more than 300 million people -- a number more than double Japan's current population -- have visited the parks, helping Oriental Land sustain profit growth even during the country's long economic slump.

But the number of visitors fell in the latest business year by 1.8%, the first decline since Tokyo Disney Sea was added. Also, the amount of money spent by the average visitor has dropped for three years in a row, as people have shelled out less on souvenirs and food and bought cheaper tickets. And any potential expansion to broaden future revenue streams is hemmed in by a shortage of land.

The decline in attendance was reflected in a 1.6% drop in Oriental Land's consolidated revenue for the fiscal year, to 331 billion yen. In announcing its earnings on May 9, the company blamed bad weather and unusually high attendance the previous year, during which Tokyo Disneyland celebrated its 20th anniversary.

Still, operating costs rose 4.2% during the latest year, which contributed to pushing down operating profit by 11% and net income by 7%, to 17.2 billion yen. A recent series of embarrassing incidents, ranging from moldy cupcakes sold at a park shop to a wheel that rolled off the Space Mountain roller-coaster (no one was injured), has pushed up maintenance costs. The latest mishap, in March, was a leak to an outside party of personal data about some 120,000 season-pass holders.

"This company is in the business of selling dreams," says Deutsche Securities analyst Naoshi Nema. Incidents related to safety and security "could be very damaging to its long-term growth."

After the latest earnings were released, Mr. Nema cut his 12-month price target for Oriental Land shares to 7,000 yen from 7,200 yen, citing higher operating costs. Yesterday, shares fell 40 yen to close at 6,500 yen. Oriental Land's 52-week intraday high of 7,280 yen was reached in July, while the low of 6,230 was in October.

The company's earnings guidance for the current fiscal year, projected earnings of 19.2 billion yen on revenue of 346 billion yen, suggests that costs will continue to rise.

Oriental Land says higher costs during the past year reflected increased spending on research and development and other expenses tied to future expansion. It expresses confidence that park attendance and profits will rebound slightly in the current fiscal year. As it adds two major rides during the next two years to boost the appeal of the Disney Sea park -- the Raging Spirits roller coaster and the Tower of Terror free-fall ride -- Oriental Land forecasts that the number of visitors to the two parks will rise by "several percentage points." Right outside the parks, it is adding more hotel rooms and building a permanent theater for Canada's Cirque du Soleil performance group.

"We will make continuous additional investments to create a series of new large-scale attractions and entertainment," Oriental Land President Toshio Kagami said in a message to investors.

Attendance levels remain high, as 25 million people visited the parks last year, Oriental Land says. That was more than double the attendance at the two theme parks at Euro Disney in France, according to an estimate by Amusement Business, a magazine published in the U.S.

Yet some industry experts believe the past year's decline in Oriental Land's revenue will continue in the longer term. They note that the average age in Japan is rising rapidly while the well-visited parks, whose business has matured, depend disproportionately on young visitors.

"They can add new rides here and there, but eventually people will get bored with the place," says Tetsuo Arima, a media-studies professor at Tokyo's Waseda University who has written several books on Disney, including one on its global theme-parks strategy. "A decline is inevitable, and all they can do is to make it as gradual as possible."

A big challenge, analysts say, is to have continual renewal of rides and other attractions to keep up the parks' appeal. But further expansion is constricted by Oriental Land's limited remaining turf -- a landfill in Maihama, less than 10 kilometers outside Tokyo's center.

"To keep growing as a company, they really need to be flexible and diversify into other businesses," says Toshihiko Okino, a UBS Securities analyst who has a 12-month share-price target of 6,700 yen.

And as Oriental Land tries to expand its horizons, it could receive support from Walt Disney. Nick Franklin, president of Walt Disney Attractions Japan, says building a third theme park elsewhere in Japan, or some type of cooperation even outside the country, are possibilities Disney and Oriental Land can pursue. "We see great potential for Disney's theme-park business in Japan," he says.

-- Source: The Wall Street Journal Online

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