Straco Corporation

[Stockerman]

How much further potential for revenue/profit growth, given that there is a a limit to how much we can "squeeze" visitors in the 2 attractions?

Is there any expansion of existing assets or acquisition of new ones?

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STRACO Corporation continued to benefit from increased visitor numbers to its two main aquarium attractions in China, with its net profit for the second quarter ended June 30 up 31 per cent to $7.8 million. Revenue was up 19 per cent to $16.4 million, compared to $13.8 million the same period a year ago.

Executive chairman Wu Hsioh Kwang said in a statement yesterday that the tourism sector in China has recovered from the H7N9 bird flu virus scare in April and May.

For the quarter, visitor numbers to the Shanghai Ocean Aquarium and Underwater World Xiamen were up 17.4 per cent and 10.2 per cent, respectively compared to the same period a year ago.

Straco last traded on Tuesday at 30 cents.

[Nick]

How much further potential for revenue/profit growth, given that there is a a limit to how much we can "squeeze" visitors in the 2 attractions?

Is there any expansion of existing assets or acquisition of new ones?

******
STRACO Corporation continued to benefit from increased visitor numbers to its two main aquarium attractions in China, with its net profit for the second quarter ended June 30 up 31 per cent to $7.8 million. Revenue was up 19 per cent to $16.4 million, compared to $13.8 million the same period a year ago.

Executive chairman Wu Hsioh Kwang said in a statement yesterday that the tourism sector in China has recovered from the H7N9 bird flu virus scare in April and May.

For the quarter, visitor numbers to the Shanghai Ocean Aquarium and Underwater World Xiamen were up 17.4 per cent and 10.2 per cent, respectively compared to the same period a year ago.

Straco last traded on Tuesday at 30 cents.

Straco reports strong growth in earnings for 1H2013

http://straco.listedcompany.com/newsroom...4A8B.2.pdf [Press Release]

http://straco.listedcompany.com/newsroom...4A8B.1.pdf [SGX Announcement]

Straco continues to maintain steady growth with 21% growth in revenue and 22% growth in core PBT in 1H 2013. There was no increase in ticket prices so it was purely increase in visitor numbers that drove the growth organically. In recent years, the aquarium visitors totaled 3 million p.a yet SOA alone has capacity of 21,000 people per day (7.6 mil p.a). Considering the 3 mil includes visitors to UWX, I don't think over-capacity will be an issue in the near term. However, it is a valid point and Straco may need to incur capex to expand SOA capacity in the future. Perhaps this is why the Management has been retaining its profits and growing its cash level over the past decade. This is just my opinion - I could be entirely wrong.

http://english.eastday.com/e/130808/u1a7578586.html - SOA will offer 50% discount for 5 days during the Shanghai Tourism Festival in Sept. The previous discount exercise was mentioned in this thread and resulted in long queues being reported.

(Vested)

[dzwm87]

Been looking at this counter for a while. Some thoughts:

1. Cash flow is predictable and Shanghai Ocean Aquarium (SOA) is operating at a 40 operating lease period which will end at Nov 2037. CAPEX has been consistent which largely/entirely has been under maintenance CAPEX. Ticket prices are public info with blended average of around RMB143 per pax [for a household of two parents and one child]. So, a DCF valuation seems quite plausible here if we couple it with some conservative assumption. My preliminary estimate has around 50% max upside but this depends on a lot of variables. Key idea is I think DCF will offer a better valuation approach than a one-year P/E valuation.

2. I don't think their aquariums are over-crowded. We know SOA has capacity of around 21,000 people per day. In 2013, PRC has around 29 public holidays + 108 weekends, with the remaining 228 being weekdays. If you assume full capacity for holiday and weekends, you will end up with a rather empty weekday visitor rate to meet the disclosed 3.2mln visitor count in 2012 [and this includes their Xiamen Underwater World]. You can tweak around and find that overcapacity is not a concern.

3. Is the company under-investing? Or are their assets' real economic useful life is way longer than what they are depreciating over? Net CAPEX has been around SGD1 to 2mln p.a. but depreciation is almost more than double at SGD5mln p.a. If the latter is true, then margin expansion will follow in the latter years and we are starting to see this in 2Q13 result. If we look at their PP&E breakdown, it's really (1) leasehold land & buildings and (2) machinery which are depreciating faster than they are replacing it. Assuming no new expansion, we could see depreciation falling by around S$3mln (rough estimate) which translate into a 5% net margin expansion at current revenue level. When will this happen, I have no idea.

4. Seem like upside potential will come from new aquarium expansion and that is a black box to all of us. At least for now, there is potential earnings growth from their CYG site but didn't they say that since their IPO? I think a less-than-optimistic view will be a more conservative approach. Mgmt seem to be quite conservative in their acquisition as aquariums have very good cash flow, so you either get them cheap from desperate sellers or you would have to pay a rich premium.

5. Also don't think Straco will be a takeover target since it will be hard to get a majority stake as founder Wu Hsioh Kwang has a huge stake in the company. Public float is only 13.92% in 2012 which means share buyback is also going to be limited as it will risk the 10% public float regulation. So, the only possible outcome is for an insider privatisation from Wu but for that to happen and given his nature from his acquisition track record, I don't thin he will offer a huge premium when the opportunity arrives.

Gladly welcome more thoughts.

[Nick]

5. Also don't think Straco will be a takeover target since it will be hard to get a majority stake as founder Wu Hsioh Kwang has a huge stake in the company. Public float is only 13.92% in 2012 which means share buyback is also going to be limited as it will risk the 10% public float regulation. So, the only possible outcome is for an insider privatisation from Wu but for that to happen and given his nature from his acquisition track record, I don't thin he will offer a huge premium when the opportunity arrives.

Gladly welcome more thoughts.

Thanks for your well thought off views dzwm87. The short land lease is certainly a risk to be mindful of though with the Company retaining a large portion of its cash-flow, I expect it to turn into a cash shell company if it still exist in 2037. Capex may also rise in the future - Don't fishes and marine life need to be replaced time to time ?

For pt 5 - Wouldn't this make it an easier (and more attractive takeover target) ? A potential suitor will just need to deal with 2 guys (Mr Wu and China Poly Group) to gain a 78% stake in the Group. This will likely occur at a price which the 2 shareholders will deem fair and in turn, it will likely to be attractive to the minority investors hence nearly guaranteeing the acquisition. This assumes that there are potential suitors and Mr Wu doesn't mind cashing out. Personally, I am hoping this morph into a dividend play in the future with increasing payout ratio.

[dzwm87]

Capex may also rise in the future - Don't fishes and marine life need to be replaced time to time ?

For pt 5 - Wouldn't this make it an easier (and more attractive takeover target) ? A potential suitor will just need to deal with 2 guys (Mr Wu and China Poly Group) to gain a 78% stake in the Group. This will likely occur at a price which the 2 shareholders will deem fair and in turn, it will likely to be attractive to the minority investors hence nearly guaranteeing the acquisition. This assumes that there are potential suitors and Mr Wu doesn't mind cashing out. Personally, I am hoping this morph into a dividend play in the future with increasing payout ratio.

They have been adding to their fishes and marine livestock each year at around S$100K to S$400K. I don't expect a S$3mln CAPEX on just replenishing fishes and marine life. Point is depreciation is running off faster than CAPEX - which means net PP&E is falling. Assuming no new expansion, depreciation eventually has to drop and that will boost margin.

For takeover target, anything can happen but like you said, Wu and China Poly Group should know the cash flow potential of this company and definitely won't sell out unless the offer is enticing. I will reckon this is rare to happen and it's more likely for Wu to privatize in any case of the severe share price plunge. That being said, these are all speculations.

I will like to add on to my point (2) above. I think the concern of overcapacity is valid after realizing that an aquarium can never run at 100% logically. This is because you can never hit a 100% ticket sale on a weekday. So, on an annual basis, around 70-80% could be the real full capacity for an aquarium? Nonetheless, even if you tinker with the %, overcapacity is still a small concern. Though we can still search tripadvisors and there are some reviews which complain about the crowd (and noisy children) but these are bound to happen everywhere including RWS Sea Aquarium.

[opmi]

Maybe I will buy 6 months later after Straco cuts dividends. Meaning privatization Lai liao.

[Drizzt]

Maybe I will buy 6 months later after Straco cuts dividends. Meaning privatization Lai liao.

could you elaborate on this? don't quite understand sorry.

[opmi]

Maybe I will buy 6 months later after Straco cuts dividends. Meaning privatization Lai liao.

could you elaborate on this? don't quite understand sorry.

it is standard pattern by substantial shareholder before they doing privatisation. cut dividends and/or take writedowns to earnings/NAV.

[Stockerman]

Agree that these are the usual dirty tricks.
Would like to add one more - systematic releases of "bad news"...

Has anyone worked out what is the possible intrinsic value of Straco?

Maybe I will buy 6 months later after Straco cuts dividends. Meaning privatization Lai liao.

could you elaborate on this? don't quite understand sorry.

it is standard pattern by substantial shareholder before they doing privatisation. cut dividends and/or take writedowns to earnings/NAV.

[portuser]

Straco's adjusted pre-tax margin in the first half of 2013 was a whopping 52%, 7 percentage point higher than the same period of the prior year:

.................................1H 2013....1H 2012.....increment
Revenue ($m)............. 27.70........ 22.83..........4.87
Pre-tax profit ($m)........19.05.........11.52..........7.53
Adjusted for other
income & forex.............14.36.........10.26...........4.10
Adjusted margin............52%...........45%...........7 ppt

This should not come as a surprise as the marginal cost of admitting a visitor to its attractions is insignificant --- practically all of the $4.87m revenue increment in the first half flowed to the adjusted pre-tax profit, raising it by $4.1m.

The adjusted pre-tax margin in 2H 2012 was 53%:

Revenue ($m)........................32.43
Pre-tax profit ($m)..................18.57
Adjusted for other
income & forex.......................17.28
Adjusted margin......................53%

Margin in the second half of the current year ought to be higher if the attractions have space for more visitors during peak periods.