How to analyse: Amusement parks

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Characteristics of the sector

  • Highly capital intensive: Currently (2015), setting up a reasonably big park will cost more than INR 1 billion in capex in India. This sets a high barrier of entry.
  • High operating leverage: Parks have ~70-80% of costs as fixed. Hence, the key to profitability is high capacity utilisation. This is why maturity of parks are important.
  • Maturity of parks: New parks will have lower capacity utilisation due to lower popularity. Hence, newer parks will be incurring losses for the initial years. As it gets popular, the park will be able to attract more footfalls, helping to take advantage of high operating leverage.
  • Non-ticket revenues: Apart from tickets, parks make money from selling food & beverages, and merchandise. Some parks have resorts as well, which gives additional benefit by means of extended stay by visitors.
  • Industry growth stages: Start -> Development -> Expansion -> Maturity -> Concentration -> Diversification
  • Key success factors: Location and infrastructure to access the park, novelty of rides, safety
Does anyone regulate them?
  • Tourism regulators at national/ state level
  • Tax authorities: Value added tax/ goods and services tax, luxury/ entertainment tax

Key metrics you should watch for

Capacity utilisation

Due to high operating leverage, high capacity utilisation is key to making profits.

  • Footfalls: mean the number of people visiting every year.
  • Occupancy ratio: percentage of occupancy in attached resorts.
Revenue

Revenue is driven by footfalls. Footfalls depend on:

  • Demographics,
  • Per capita disposable income,
  • Variety of rides, and
  • Accessibility & location.

When you look at revenues, the key metrics to watch are:

  • Average revenue per visitor
  • Revenue composition: Look at Ticket – Non ticket split. Non-ticket revenues are bonus, as they involve much lesser capex.
    • Globally, ticket revenue is ~30% of sales. Rest of the revenue is split between F&B (food and beverages), and resorts (attached as part of the park).
    • Indian amusement parks generate ~80% of the revenues from ticket sales (in 2012). Resorts (18%) and F&B (2%) generate the rest.
  • Seasonality: Peak seasons are during festivals and summer holidays. In India, seasonality is as below:
    • Peak season: April-June (Summer season holidays) and October-December (Festival season)
    • Lean season: January-March (Exams) and July-September (Monsoon rains)
  • Maturity of each park: Older parks will have higher footfalls due to popularity
  • Upcoming parks: Parks that are in the pipeline indicates the future revenue potential of the company
Profitability
  • EBIT or EBITDA margins: As I said earlier, newer parks are most likely to run at losses due to lack of popularity. Mature parks will have high margins due to higher capacity utilisation and operating leverage. So, don’t avoid a company if it is making losses – try to see whether this is due to younger portfolio of parks.

Valuation

Fundamental: DCF

Relative: EV/EBITDA, P/E

Bottom line

Selecting a good amusement park business stock mainly involves looking at capacity utilisation vis-a-vis maturity of parks. If the parks are new, you have to see whether the trend of capacity utilisation is trending up, for each park. If they are mature, but capacity utilisation is not quite high, it’s time for questions.


Major listed ‘Amusement park’ stocks in India:

Wonderla, Adlabs Entertainment


Note: This post is part of “How to analyse” series. I will continue to update the post, as I learn new stuff about the industry.

Feedback: Your feedback is important to me. It helps me correct my mistakes and lets me learn new things. Please leave your feedback in comments.

Image source: Pixabay


 

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