Golden Heaven Group Coasts On Major Amusement Park Expansion (GDHG)

By Doug Young

It’s been a roller coaster ride this year for amusement park operator Golden Heaven Group Holdings Ltd. (NASDAQ:GDHG), whose slow start as China emerged from three years of pandemic isolation has rapidly accelerated with improving performance and plans for a major expansion.

Golden Heaven’s stock has more than tripled since early September, as China’s leisure and travel sector bounces back sharply following the end of most of country’s strict Covid restrictions late last year. Unlike many of its peers, Golden Heaven managed to stay profitable in the pandemic’s last two years, largely due to its status as operator of smaller, regional amusement parks that derive much of their revenue from nearby customers.

The company continued to post profits in its latest reporting period for the six months through March, as well as modest revenue growth.

But investors are most excited about Golden Heaven’s plans announced last month to add three new parks to its portfolio, boosting its count by 50% from the current six. The addition will probably be even bigger in revenue terms, since the three new parks are all relatively large for the company, with total investment of nearly 600 million yuan ($82 million).

That’s not small change for a company that had just $28.3 million in cash at the end of March, the midpoint of its fiscal year. It added another $7 million in proceeds from its April IPO, though those two figures combined are still less than half of what it will need to build the new parks. Of course, it will probably rely on loans for most of the funding, which should be easy to obtain due to its profitability and relative immunity to economic slowdowns.

China’s amusement park market is huge, providing plenty of opportunity for global names like Disney (DIS) and Universal Studios, as well as big local players like Wanda. The overall market grew steadily pre-pandemic, and was worth 12.2 billion yuan in 2019, according to third-party data provided in the company’s final prospectus filed in late March.

But then the pandemic struck, forcing many parks to close or limit operations. The industry spiraled downward like the roller coasters that are its trademark, tumbling by nearly half to 6.53 billion yuan in the first year of Covid in 2020. It’s been back on an up-track lately with the pandemic’s end, and is expected to return to pre-pandemic levels with annual revenue of about 12.7 billion yuan in 2025.

“Theme parks have recovered above the tourism sector average, with attendance rebounding and exceeding pre-pandemic levels in the first two months of 2023 for some of the top parks,” Fitch Ratings said in a report on the Chinese sector in March. It added it expects the recovery to continue throughout this year on pent-up leisure travel demand.

Regional operator

While a travel rebound is crucial to the biggest parks like Disneyland and Universal Studios, which draw people from across China, Golden Heaven is noteworthy for its position as a regional operator of smaller parks that typically are more affordable and local. That makes the company relatively immune from economic slowdowns, since it isn’t reliant on families taking big vacations that may get cut from their budgets during difficult times.

Equally important, the company’s parks are all located in Southern China, meaning they can operate year-round without too much negative impact from cold winter weather.

As we’ve previously noted, Golden Heaven was profitable for the pandemic period covered in its IPO prospectus, posting a $13.6 million profit in its fiscal year through September 2021, and $14.3 million in the following fiscal year through September 2022, representing 5% growth. The company’s revenue rose 9% over that period from $38.5 million in the 12 months through September 2021 to $41.8 million the next fiscal year.

Its revenue grew 6% year-on-year to 140 million yuan in the six months through March this year, the first half of its fiscal year. Its profit growth accelerated to 12%, totaling 51.8 million yuan during that period, according to its maiden earnings report released in August.

While the company’s six existing parks are performing relatively well, especially considering the challenging environment during the pandemic, investors were clearly excited about last month’s announcement of the three new parks. Golden Heaven previously disclosed its plans for the three in its prospectus, saying each would cost roughly 150 million yuan, or 450 million yuan in total.

The final 590 million yuan price tag in the October announcement is quite a bit higher than that, which seems to reflect the company’s growing confidence that China’s amusement park market is on a healthy recovery track.

The biggest piece of the new plan is two major parks in the city of Changde in Hunan province costing a combined 450 million yuan. The third park will be located in the city of Anshun in Southwest China’s Guizhou province, costing 140 million yuan. All three parks will be built by Fujian Xinchang Construction Engineering Co., with one set to open next year and the other two in 2025.

Golden Heaven sold its IPO shares for $4 apiece back in April, and the stock traded mostly around that level for its first five months on the Nasdaq. But starting in early September the stock began to climb, and the upward momentum accelerated after the new parks announcement. The shares now trade at more than triple their IPO price, including their latest close at $17 on Thursday.

That rapid rise has given Golden Heaven a lofty price-to-earnings (P/E) ratio of 44. U.S. giants Six Flags (SIX) and SeaWorld Entertainment (SEAS) trade well below that at multiples of 22 and 12, respectively. Meantime, another competitor, Songcheng Performance Development (300144.SZ) trades at the highest ratio, with a forward P/E of 41.

We wouldn’t be surprised to see Golden Heaven sell more stock in the months ahead to take advantage of its high valuation and satisfy its need for cash to fund the new parks, especially after its April fundraising was lower than its earlier goals. But that’s just the start of a new ride for the company, which will need to show investors it can not only keep the profits coming, but also boost them considerably as the new parks open and gain momentum.

Disclosure: None.

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