Straco Corporation

[miguelneto]

Weijan, thank you for your contribution here.

I watched some YouTube vlogs in Shanghai to see how the city was doing. Just looking at the videos, everything seems like it's back to normal, lots of people on the streets, etc. I actually tried to ask around on Reddit to see if anyone who lived in the Shanghai area could perhaps tell me if SOA is busy, etc.

Do you have any idea how they did in terms of foot traffic in the summer months?

Best,
Miguel

[weijian]

I do not think Shanghai can be doing that bad, with it been the "Pearl of the Eastern Orient".

The headline news show ~20-30% reduction in total spending in the Golden week. My intuitive feel is that we probably can't get too far away using this approximation.
https://www.scmp.com/economy/china-econo...below-last

One more interesting thing to note is the earlier 30% limit on capacity a few months back, has been relaxed. From Ctrip, SOA's max capacity is at 50%, while SHCOP is at 75%. This probably reflects the difference in the surroundings between both sites (SOA is mainly indoors, while SHCOP is outdoors).

Another interesting thing to note is that SHCOP's ratings is now at 4.6/5 (number 4 on Shanghai popular list), compared to SOA's 4.5 (number 8 on Shanghai popular list).

SHCOP ratings on ctrip: http://you.ctrip.com/sight/shanghai2/4651499.html
SOA ratings on ctrip: https://you.ctrip.com/sight/shanghai2/18722.html

[miguelneto]

Thank you! Very interesting.

SHCOP is a more complete, Disneyesque experience.

I think SOA will always benefit from a spill-over of tourists given its location in the "Wall Street" of Shanghai, but SHCOP will allow use to see the quality of SOA's earnings (i.e. durable or not so durable).

It's interesting to not that management mentioned visitor numbers might have been affected by SCHOP but not Disneyland, despite the latter being much closer.

Disneyland visitor numbers: https://www.statista.com/statistics/8761...0in%202019.

SCHOP did <1 million in the first 5mo after opening. They might be doing something like 3 million visitors a year now. You can look at their AR (which includes other parks) at http://www.haichangoceanpark.com/wp-cont...2b8063.pdf

[miguelneto]

I sold my Straco Corp. investment. This was not a particularly easy decision, there are arguments for and against Straco that I consider very valid.

We are talking about the 2 aquariums, which represent approximately 2/3 of the turnover - one of which, Shanghai's, represents 80% of the aquariums. In fact if we take Straco's highest profit year, they are currently selling for 4.5x pre-tax profit. It is a high-margin business, with lots of operating leverage, with no accounts receivable, no inventory and it therefore produces a lot of cash.

The first problem I have is that I don't know what the base rate for the continued success of aquariums is, i.e. how durable is the business? Do aquariums become outdated like Weijan mentioned? Of course, I can't just look at the historical data of aquariums that opened 20 years ago and still exist, because doing this analysis would incur the fallacy of survival bias.

Now there is one thing that I know. I know that if an aquarium is very well located I increase the likelihood that it will succeed. There is a spill over effect if I have it at the tourism hotspot. And SOA is well located.

The other problem is the problem of competition. Yes, it is very unlikely, or almost impossible (although I don't know the site personally), that an aquarium/theme park will be built next to SOA. However, most SOA visitors are domestic tourists. What stops them from going to another park, perhaps more complete (ex: Disneyland)? And perhaps they prefer it because they are not in an overcrowded international tourism hotspot like Shanghai? An example of this is Haichang Park, it is more of an Disneyland experience. It also has aquariums, etc. It is 1 hour from SOA - and how did I know to what extent people do not prefer this experience? On one hand they have a super well located asset, on the other hand I have difficulty in finding out the durability. I think that in order to understand better, I had to understand, on average, who their customer is. I had to understand how the aquarium fits into the customer's trip. Are you a customer who goes to Shanghai and happens to take the opportunity to go to the aquarium? Are you a customer who really wants to go to that aquarium and not another one, just wants the experience of going to an aquarium?

If you put a poor restaurant in a very well-located place, it probably fails. If you put in a good restaurant and that restaurant remains good, the business will probably work out. But if I put up an average restaurant, who wins? The location or the restaurant?

Is going to SOA an average experience compared to the other options? I am inclined to say it's more of an average experience rather than an superb one, compared to the other options. But I may be wrong. Aquarium ratings on the internet:

Google: 4.1 (292 reviews)
Tripadvisor: 4 (965 reviews)
Trip.com: 4.5 (21,157 reviews)

I think the biggest complaint I read about the aquarium is over-crowding. If over-crowding is a problem, why didn't management manage it better? Over-crowding makes the experience bad. On the other hand, maybe it pays to have a little over-crowding because most of your customers only go there once - it's not a repeat purchase.

We know that the aquarium costs were between S$ 50 to S$ 55 million dollars. How much will they manage to earn in the future without alienating customers with problems like overcrowding? And how likely is it that people will still want to go there? There is some demand because the aquariums had a turnover of S$ 24 million in 2020 when they were closed for several months. Management even managed to reduce costs by 50% and achieved a pre-tax profit of +S$ 10 million.I would say that taking into account the turnover of 2020 the demand is at least S$ 24 million and at most S$ 85 million (year of highest turnover). And where will Straco be able to maintain itself?

Summary:

PRO

- The aquarium is very well located
- The aquarium still had significant demand during COVID
- The aquarium sells the majority of tickets to domestic tourists, which in general increases the degree of tourism predictability (if Straco sells the majority to foreign tourists the results would have been much worse in 2020, and Straco would also suffer from the effect of variations in the exchange rate that is important for foreign tourists

AGAINST

- We don't know the base rate for aquariums
- We know that there is competition that is likely to provide better experiences, so to what extent will people want the SOA experience?
- We know that Shanghai is a giant city and that is why there will always be investors willing to create a new business
- We know that there is an overcrowding problem

If Straco manages to keep FCF at S$40 million per year, they are probably worth around S$600 million (including cash). If it drops to S$20 million per year, they are probably worth around S$380 million. Adjusted for net cash and using the current market cap of S$490 million and an 8% discount rate, the market is assuming Straco will generate S$28 million in FCF per year.

Right now that is not a bet I think is worth making. I don't know enough about the durability of the business to bet.

[karlmarx]

Good thought processing.

Tourist attractions often have long lives. So if Straco's management does not deteriorate, and efforts are made to continuously rejuvenate SOA, I think there is a high probability that SOA still has good years ahead. So I wouldn't think it will be ill-advised if one were to buy Straco shares now. But I don't see it as very attractive either.

China still has many years of good growth ahead.

[weijian]

 So I wouldn't think it will be ill-advised if one were to buy Straco shares now. But I don't see it as very attractive either.

China still has many years of good growth ahead.

I thought this probably sums up the view on Straco - there are enough "bad news" baked in, and hence all it takes is for a change from "bad" to "acceptable" for one's investment to be profitable. The business is still FCF generative but considerable doubts remain on the ability to constantly rejuvenate in the face of nearby competition. 

But then again, the same stock has different utility for different people. Example, some needs it for diversification, some position it for Covid-19 recovery, some treat it as core.. Essentially, people who come up with the same conclusion after doing their fundamental analysis may eventually still deviate in their buy/sell decisions. Sometimes, all of us can't see this different utility clearly and gets frustrated as they cannot understand why another cannot see what they are seeing.

By the way, welcome back Karlmarx.

[edragon]

Good thought processing.

Tourist attractions often have long lives. So if Straco's management does not deteriorate, and efforts are made to continuously rejuvenate SOA, I think there is a high probability that SOA still has good years ahead. So I wouldn't think it will be ill-advised if one were to buy Straco shares now. But I don't see it as very attractive either.

China still has many years of good growth ahead.

2 aspects of 'over'.

The educational value is overlooked by investors but not the Government and the visitors. 

"I think the biggest complaint I read about the aquarium is over-crowding. If over-crowding is a problem," Looks like there is an overwhelming demand! Isn't it a good thing- Demand vs Supply.

Food for thoughts!

[miguelneto]

Good thought processing.

Tourist attractions often have long lives. So if Straco's management does not deteriorate, and efforts are made to continuously rejuvenate SOA, I think there is a high probability that SOA still has good years ahead. So I wouldn't think it will be ill-advised if one were to buy Straco shares now. But I don't see it as very attractive either.

China still has many years of good growth ahead.

2 aspects of 'over'.

The educational value is overlooked by investors but not the Government and the visitors. 

"I think the biggest complaint I read about the aquarium is over-crowding. If over-crowding is a problem," Looks like there is an overwhelming demand! Isn't it a good thing- Demand vs Supply.

Food for thoughts!

Absolutely on the second point.

That's why I said that, if most visitors are not repeat visitors then maybe overcrowding isn't that big of an issue. But if most are repeat then it is, because it becomes a bigger detriment to the experience. But in general, I don't think it's good for the customer experience, reviews, prospective customers, etc.

On the first point, yes, but visitors can also get educational value from Haichang Park, etc. But competition may be outweighted by the fact that SOA is in such a good location.

I look for obvious bets. SOA is not very obvious to me.

[karlmarx]

Value Investing is about the use of reason and evidence to make investment decisions.

Sometimes you make money when your reasoning is correct/sound, but sometimes you don't.

Sometimes you also make money when your reasoning is incorrect/unsound, but also sometimes you don't.

If very very smart individuals can lose money, or produce only mediocre results, you have to wonder your chances of achieving sustained positive or above-index/benchmark returns.

Although, over time, the survivors/winners of investing seems to suggest that superior reasoning does produce superior results, over the long-term.

My point is that there are probably far fewer 'obvious bets' than we think. And luck plays a big part in success. At least I'll admit that for myself.

And if it is an 'obvious bet' to most, then it couldn't be a very financially rewarding investment because it would have been bid up.

Nevertheless, this is what the value investor must do (i.e. look for obvious bets which are not obvious to most). 

===

SOA has a good location, and the attraction is also popular (for now).

There could be more competition for tourist activities, but there isn't any upcoming similar attractions in the immediate vicinity.

Could both SOA and Haichang Park enjoy overwhelming success? I'm not sure, but could that not be a possible outcome?

I know very little about SOA or attractions in Shanghai, which is why I remarked earlier that Straco wasn't attractive to me. But individuals with more intimate knowledge or insight of these may see it very differently.

[karlmarx]

By the way, welcome back Karlmarx.

Thank you Weijian.

I hope to write more but good ideas are just so hard to come by. And the world is moving much faster than I can comprehend. I think VB needs more new blood to write about tech stocks and the like.