Straco–Maiden Contribution from Singapore Flyer

On first glance, the fourth quarter results do not look favourable. Net profit for the quarter was down 21.3%. Revenue was up 32.8%. the highlight for this quarter was a month of contribution from Straco’s new acquisition, the Singapore Flyer.

Operating expenses was higher and increase of 3.4 mil or a 61% increase, basically factoring increase in costs due to administration of aquarium business bus largely due to expenses incurred by the Singapore Flyer.

Administrative expenses was 3.2 mil higher or 119% higher due mainly to one off expenses related to the acquisition, such as stamp duty paid for the investment property acquired and legal and professional fees amounting to 1.98 mil.

Much to my disappointment, I would have thought that the currency movement between Renminbi and Singapore dollars would allow for some currency gains, but that end up with a slight loss.

Maiden results from the flyer

In terms of segmental reporting, there have been a clear segregation between the Aquariums, which refers to SOA and UWX, and Giant Observation Wheel (GOW), which refers to the Singapore Flyer. The Lintong cable car will go under other operations.

The Flyer, which cost $140 mil to purchase is accounted as $92 mil as plant, property and equipment, and $50 mil as investment property. Instead of paying with cash, management decides to $94 million to finance it.

The reason for not paying off with cash is I believe a more lucrative carry trade since interest income in Renminbi is much higher than that of the borrowing in SGD. Considering the $112 mil in cash, Straco is still in a net cash position.

The segmental reflects the data for 1 month:

• Revenue: $3.7 mil
• Interest expense: $0.13 mil
• Depreciation: $0.7 mil
• PBT: –$0.6 mil

We do not know where the $1.98 mil one off acquisition expense is recorded, but highly believe that would be under the administrative expenses. If this expenses is one off, and if you account for it, then the PBT for the GOW segment would actually end up positive.

The expenses here works out to be: 3.7 – 0.13 – 0.7 + 0.6 = 3.47 mil.

A check up previous 3 quarters overall operating expenses (which do not include any GOW numbers since it wasn’t recorded) was consistently $1 mil higher than 2013. Since this quarter the operating expenses was higher by 3.4 mil, it leads me to believe that the operating expenses attributable to GOW could be 2.4 mil.

If you subtract 2.4 mil and 1.98 mil (one off acquisition expenses) from 3.47 mil, you get 0.9 mil, which is pretty close to the 0.7 mil in depreciation.

The surprising thing to me about this result was that if we don’t consider the one off expenses, they are in profit. When I first compute the possible value based on the estimates CIMB released back in Aug 2014 (read here), we only thought it would be cash flow positive.

This number seems a far-cry from the analyst estimates, which is a lesson to us all that we should a lot of times take the figures provided with a pinch of salt.

It would be easy for us to estimate the PBT for  full year to be –0.6 +1.98 = 1.38 mil x 12 months = 16.56 mil – 1.65 mil (minority share holders) – 2.8 mil (tax) = 12.11 mil.

In terms of cash flow we can add back 8.4 mil in depreciation and that will come up to 20.5 mil.

The problem is that this kind of estimation will never work since after we are familiar with Straco aquarium that tourist arrivals are not uniform and this kind of extrapolation is bound to end in tears.

Secondly, capital expenditure to improve the place have not been considered, and perhaps would reduce cash flow in the short term.

Thirdly, we are seeing much changes in the past one month. There seem to be a few tenants moving out and perhaps some tenants coming in. Since we are aware that the past rents have been below market rate, and occupancy is not at full capacity, there are room for improvement but also short term impact as tenants move out and new tenants need time to renovate the place.

Aquariums

Q1 SOA and UWX figures (with % change in brackets):

• 2007: 201,000
• 2008: 326,000 (62%)
• 2009: 373,000 (14.4%)
• 2010: 336,000 (-10%)
• 2011: 374,000 (11%)
• 2012: 407,000 (8.8%)
• 2013: 498,000 (22.36%)
• 2014: 608,000 (22%)

Q2:

• 2007: 309,000
• 2008: 466,000 (50.8%)
• 2009: 466,000 (0%)
• 2010: 490,000 (5%)
• 2011: 550,000 (12%)
• 2012: 603,000 (9.6%)
• 2013: 686,000 (13.8%)
• 2014: 840,000 (22.4%)

Q3:

• 2007: 414,000
• 2008: 658,000 (59%)
• 2009: 650,000 (-1%)
• 2010: 1,073,000 (65%)
• 2011: 869,000 (-19%)
• 2012: 947,000 (9%)
• 2013: 1,260,000 (33%)
• 2014: 1,650,000 (30%)

Q4:

• 2007: 313,500
• 2008: 384,000 (22.5%)
• 2009: 371,000 (-3%)
• 2010: 465,000 (25%)
• 2011: 454,000 (-2.3%)
• 2012: 506,000 (11.4%)
• 2013: 590,000 (16%)
• 2014: 609,000 (3%)

Q3 take up a huge proportion of revenue and you can see the crazy growth there in comparison to the other quarters. In the past 2 years where intra-China tourism is taking off in a big way have been a good thing for Straco. The Q4 change in visitors have been very small but as you can see from the data you cannot draw a conclusion that just because this quarter the result have been lukewarm that the next few quarters will be as such.

Competition in China

We are not sure whether the purchase of the flyer is a response but it seem competition looks to be heating up. Perhaps at the end of the year, Disneyland Shanghai Phase 1 would be ready. The management seems cool about this, and they felt that this would be beneficial to Straco by bringing more tourist to Shanghai. The tickets are estimated to be  priced at HK$300, while SOA’s prices should come up to HK$180.

There is the prevalent thought that, there is no competition since people would want to go to the Star Attraction, plus there are more things to do.

Haichang Group, which recently got listed HKSE, will build their Ocean Theme Park in Shanghai schedule to be completed in 2017. Haichang group runs a few theme parks in China and the location chosen is rather far from SOA. SOA happens to be very much at the heart of many popular Shanghai tourism spots such as the Bund (no 1 ranked among TripAdvisor) and Pearl Tower.

If there is one theme attraction that should be more worried about this, it has to be the current theme attraction in Shanghai, Happy Valley. Happy Valley is ranked no 17 among TripAdvisor (as compared to SOA which is ranked  33)

I tend to think that Disneyland will attract more tourist to Shanghai and this would be complementary to SOA. However, the positive impact would be balance off by losing some of the crowd to these more interactive places.

Cash Flow and Valuation

Straco currently trades at a market cap of $631 mil. Based on a net profit of $37.7 + $1.89 mil = $39.6 , the PE is 16 times. That’s hardly cheap and do not provide a margin of safety. Much of whether we can purchase it at this point very much boils down to the growth rate (stagnant, 5% or 10%) and the performance of the flyer.

I like to think that with the moves being made cited in the last report,  and the positive numbers we see here, together with the rent improvement, we may be able to see a 5% growth in aquarium profits and a $12 mil full year contribution in GOW profits. This puts forward net income at $54 mil.

This works out to a PE of 11.7 times.

Valuation does not look extended. However, should Disneyland becomes unfavourable, then a sell decision seems a more suitable course of action.