Straco Corporation

Future value creation should likely come from the Singapore Flyer. There remains to be a lot of potential and the challenge comes from unlocking it.

From a location perspective, SOA is in a prime area and I think that is a main consideration for a lot of visitors. If HCOP is indeed winning market share, I would expect a larger fall in visitor numbers for SOA. Bear in mind that they are probably hitting peak capacity and it's normally difficult to sustain it at that level. This is why I agree that forecasting any growth in admission numbers for SOA is an aggressive one. Longer-term, their lease is also expiring in about 15 or so years. So from an investor's perspective, do you want to pay more than 15x earnings for it?

Yes, investors know about the cash flow profile and they might do some revamp but how much do they need to spend? Even if they tear it down and rebuild it at a rough $60 million cost, I think that's just one year of operating cash flow. At current value, I think there is upside since market is worried about a zero revenue quarter for 1Q and 2Q. But I don't think it's a screaming buy.

(03-03-2020, 09:04 PM)miguelneto Wrote: I wrote up Straco in May of 2019 at my blog: https://netosnotes.blogspot.com/2019/07/...elops.html

I revisted the company recently after the continued price drop: https://netosnotes.blogspot.com/2020/02/...ation.html

And I've also made a short presentation on the company: https://drive.google.com/open?id=1yONP6W...pWHU4vm84G

I think long-term, SCL owns high-quality assets.

an analysis of the competitive landscape especially on SOA will be very useful

(04-03-2020, 07:59 AM)karlmarx Wrote:

(03-03-2020, 09:04 PM)miguelneto Wrote: I wrote up Straco in May of 2019 at my blog: https://netosnotes.blogspot.com/2019/07/...elops.html

I revisted the company recently after the continued price drop: https://netosnotes.blogspot.com/2020/02/...ation.html

And I've also made a short presentation on the company: https://drive.google.com/open?id=1yONP6W...pWHU4vm84G

I think long-term, SCL owns high-quality assets.

SOA's visitor numbers does not look like it is growing. And all of SCL's visitor numbers fell slightly last year. In the next 5 years or so, SOA may also have to spend a bit to spruce up the place. So I think a valuation of 15x p/e for SOA looks a bit aggressive to me. 

Given the current market price, the implied valuation of SOA looks quite realistic.

In 2016 Straco reached peak FCF in 2016, at S$70M. Since 2016 visitors dropped 10%. Now naturally, because of operating leverage, Straco's FCF dropped over 20%. Market cap dropped some 45%.

These are the factors that probably affected the nº of visitors:

But I also think a lot of the things that have reduced the number of visitors to Straco are not exactly under their control:

(1) Ferries to Gulangyu Island were limited in 2014
(2) Singapore Flyer issue in 2018
(3) Singapore Flyer closed again in 2019 since November
(4) Coronavirus has them close all attractions

I'd say that all of these, except for perhaps the Singapore Flyer's second and on-going problems, were exogenous factors that affected visitorship - factors that were not under their control.

A P/E of 15x gives you a very conservative valuation of an EV/FCF of 7.5x

(04-03-2020, 07:55 AM)weijian Wrote:

(03-03-2020, 09:04 PM)miguelneto Wrote: I wrote up Straco in May of 2019 at my blog: https://netosnotes.blogspot.com/2019/07/...elops.html

I revisted the company recently after the continued price drop: https://netosnotes.blogspot.com/2020/02/...ation.html

And I've also made a short presentation on the company: https://drive.google.com/open?id=1yONP6W...pWHU4vm84G

I think long-term, SCL owns high-quality assets.

hi miguelneto,
Thanks for posting your Straco's analysis, I learnt alot from it. I think your journey from May2019 to 4th Feb, and beyond that, will be complimentary to the excellent fundamental analysis you have done.

A couple of thoughts to your discussion:

- You made references a few times to the excellent location of SOA (also been made by various VBs here in the past) - It can't be denied that a good location is supremely conducive for a visit, but i thought it might be overrated especially if the ultimate attraction is the experience it brings. Case in point, Wisma Atria and Ion Orchard are located in the same vicinity down Orchard Road, but there is no debate which offers a better experience - who is going from strength to strength, and who is going down the slippery road to oblivion. And then become worth more when "dead" than "alive"!

- I haven't been to HCOP but as per what you suggested, it does look like a SOA-Disneyland cross-breed. Disneyland and SOA weren't close enough and hence Disneyland became complimentary to SOA by expanding the entire Shanghai tourist pie, but the same can't be said for HCOP's impact onto SOA-Disneyland. Disneyland has a moat with its IP and will be spending CAPEX to renew its assets. I wonder what kind of asset renewal has been done or would Chairman Wu be doing for SOA to attract repeat visits? I thought it is too much of a coincidence that SOA's decline in visits actually coincide with HCOP's ramp up in operations.

- I thought the crux to an investment in Straco - is not the FCF generative ability nor its cash holding - These are quite clear to every investor who bother reading other comments or the AR itself. As you have alluded, it would be how Chairman Wu uses its 2 mentioned abilities to make new acquisitions. Things haven't been cheap in the last few years (unlike SF which came as a distressed asset in 2014). So it would be interesting to see what will happen to those leveraged tourist/entertainment players and how Straco can take advantage of the situation, moving forward.

Haichang Park (73 acres, mix of SOA and Disneyland) is over an hour away from SOA. Disneyland (963 acres) is about 40min away. Considering SOA is very much central in Shanghai, both of these parks, and naturally, are so big that they can't be built in the city center as there is no space. So tourists, are going to have to leave city center to go to these parks. So, because they have to purposely move away from city center and travel, I think it's more likely they pick Disneyland, because of the IP, than Haichang. Also, Disneyland is much bigger. So, in that regard Haichang competes more with Disneyland than with SOA. 

You mentioned Haichang affecting SOA visitors. We don't have segmented data for SOA visitors, but you can divide revenue into an average ticket price. SOA's revenue hasn't really changed much since 2015, and so hasn't visitorship. I think the factors that are listed in the presentation were the ones that caused the decrease in visitorship. 

A big part of investing in a company is the quality of management, so naturally having someone that has demonstrated an abiility to allocated capital effectively is fundamental.

In terms of repeat visits, I think that's a great question. And naturally this isn't going to be as good as the Adobe-type business of Photoshop where it's a recurring service. But some things that contribute to repeat visits are:

(1) Schools, as students get taken on excursions
(2) Parents with young kids, are also the type of people you'd expect to visit maybe once a year
(3) Changing up marine life variety
(4) One-off type events (ex: underwater shows)

(04-03-2020, 04:33 PM)miguelneto Wrote: These are the factors that probably affected the nº of visitors:

But I also think a lot of the things that have reduced the number of visitors to Straco are not exactly under their control:

(1) Ferries to Gulangyu Island were limited in 2014
(2) Singapore Flyer issue in 2018
(3) Singapore Flyer closed again in 2019 since November
(4) Coronavirus has them close all attractions

I'd say that all of these, except for perhaps the Singapore Flyer's second and on-going problems, were exogenous factors that affected visitorship - factors that were not under their control.

A P/E of 15x gives you a very conservative valuation of an EV/FCF of 7.5x

I  do acknowledge that a large part of their visitor numbers may not be something that is within their control, and that management has probably done their best to bring in visitors.

Even so, being hit by things that are beyond them -- while perhaps regrettable -- cannot excuse the company from its valuation.

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I suppose to some investors, 15x p/e or 7.5x EV/FCF for Straco may be conservative. They may have more aggressive/optimistic projections of visitor number/sales and profits/dividends. I'm not sure if this is realistic.

What I think is probable is that when the covid situation is done and over, Straco will be priced higher than present.

(03-03-2020, 09:04 PM)miguelneto Wrote: I wrote up Straco in May of 2019 at my blog: https://netosnotes.blogspot.com/2019/07/...elops.html

...

Hi migualneto, 

Thanks for the write ups, I found the analysis of nearby compeditors useful.  Straco is now trading around 9X earnings (for a 'normal' year of operations), ex cash.  Moving into value territory.

However the SOA lease stops in Nov 2037 (p126 of the 2018 Annual Report).  This is the biggest factor affecting valuation.  May I ask, where did you see that there is an option to renew it?  I could not find any mention in the 2018 AR, though it mention an "option to renew" for another lease on p127.

(04-03-2020, 09:48 PM)BlackCat Wrote:

(03-03-2020, 09:04 PM)miguelneto Wrote: I wrote up Straco in May of 2019 at my blog: https://netosnotes.blogspot.com/2019/07/...elops.html

...

Hi migualneto, 

Thanks for the write ups, I found the analysis of nearby compeditors useful.  Straco is now trading around 9X earnings (for a 'normal' year of operations), ex cash.  Moving into value territory.

However the SOA lease stops in Nov 2037 (p126 of the 2018 Annual Report).  This is the biggest factor affecting valuation.  May I ask, where did you see that there is an option to renew it?  I could not find any mention in the 2018 AR, though it mention an "option to renew" for another lease on p127.

2037 is still some time away - 17 years is a long time. However, I believe I found that in the prospectus: https://links.sgx.com/FileOpen/Straco%20...ileID=3183.

It's the nº1 footnote on page 68. 

Straco is trading at an EV/FCF of 7.5x if you exclude the S$18M in pre-tax profit from the flyer. If you assume the flyer goes back to normal then it's trading at an EV/EBIT of 5.9x.

Thanks, miguelneto!

(04-03-2020, 05:05 PM)miguelneto Wrote: Haichang Park (73 acres, mix of SOA and Disneyland) is over an hour away from SOA. Disneyland (963 acres) is about 40min away. Considering SOA is very much central in Shanghai, both of these parks, and naturally, are so big that they can't be built in the city center as there is no space. So tourists, are going to have to leave city center to go to these parks. So, because they have to purposely move away from city center and travel, I think it's more likely they pick Disneyland, because of the IP, than Haichang. Also, Disneyland is much bigger. So, in that regard Haichang competes more with Disneyland than with SOA. 

You mentioned Haichang affecting SOA visitors. We don't have segmented data for SOA visitors, but you can divide revenue into an average ticket price. SOA's revenue hasn't really changed much since 2015, and so hasn't visitorship. I think the factors that are listed in the presentation were the ones that caused the decrease in visitorship. 

The way you segment out SOA from HCOP/Disneyland is probably true, if every tourist starts their journey from or stay in the city center. Shanghai is 10x the size of Singapore and about 5x more population. Since China's tourism tailwind is driven by domestic demand, i am not sure if everyone could actually afford to stay in the city center of the most affluent state in their country? And wouldn't price-conscious consumers actually decide to go to HCOP (which is more Chinese centric) which has both rides/aquariums and then skip the other two (SOA/Disneyland) instead?

Putting the price of Straco aside, I think you are probably under estimating the impact of competition and also the fading of the novelty factor. Right at home in Singapore, Underwater World Singapore (similar aquarium attraction) lasted for ~25years before it was eventually crowded out by newer attractions and a bigger aquarium by RWS (SEA). But UWS's decline started after GFC2008 (didnt really recover from it), it was wowed out by SEA from 2012 onwards, and went out of business in 2016. SOA is in its 18th year and while there are 17 more years to go, the attractiveness/novelty of an asset is not correlated to how long its lease is. This is especially true when the city's development is relatively mature/stable, while the number of new attractions (competition) continue to spring up.

Good news!
SOA The aquarium will resume normal operation from 18 March 2020.


(click to read sgx announcement)

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