Cash-cow China Aquarium Operator
S$ 1 = US$ 0.72
Aquarium Operations (SOA 95% owned)
Straco built has a very well located aquarium in the heart of Shanghai. The location alone has a very significant impact on the probability of the aquarium having sustained earning power. If we assume SOA doesn't grown and can sustain S$45mn in pre-tax profit per year and a 30% tax rate, we have S$31.5mn in profit. The enterprise value is S$495mn, meaning investors are paying just under 16x earnings for a very-well located aquarium and getting the rest for free. The rest probably amounts to another S$25 in profits. All in all, investors can buy the company for approximately 10x profit.
[Note: I had previously talked about Straco's ability to increase the nº of visitors to aquariums quite significantly - basing my capacity expectations for aquariums on management's estimate of the number of people the aquarium could hold. However, after sharing the idea with another investor and a more thorough look at reviews, there doesn't seem to be much room to expand the number of visitors. This is further confirmed by looking at visitors per sq. m., which are quite high at SOA and around average for UWX.]
Background
Straco Corporation develops and acquires assets in touristic locations, and the founder and his wife collectively own 55% of the shares, with the other big shareholder being a state-owned enterprise. As of today, they own and run two aquariums in China (Shanghai Ocean Aquarium and Underwater World Xiamen), a cable car in Lintong Mountain and a giant flywheel in Singapore. In 2018, they received 4.98mn visitors with the majority being locals.
Together these assets cost S$226mn, some were acquired, and some were developed. Last year they generated S$65mn in pre-tax profit. In the past Straco’s management – which is nimble because of the large stake the founder has – has acted opportunistically by buying or developing assets in Asia, with a focus on China. The two aquariums, SOA and UWX, help bring the point forward. If these two assets were valued as separate entities, they’d both be worth multiples of what they cost Straco- since 2008, when Straco started segmenting the attractions for reporting purposes, both aquariums have done almost S$500mn in pre-tax profit. If I take what they paid for UWX in 2007, S$12.7mn, and what it’s worth today considering it generates S$9.8mn in pre-tax profit, I get a CAGR of 20.9% on the investment.
Most of Straco’s costs are fixed by nature, about S$53mn. That means that if we take revenue per visitor of S$25 and the 4.98mn visitors, we get a number that is well above the (approximate) amount of fixed operating expenses. This means Straco could have much less visitors and still not lose money.
The group’s increase in revenue and profit over the last 10 years, was driven in part by the 10.7% growth p.a. in visitors, an increase in ticket prices and a higher margin on incremental revenues. Straco’s EBITDA margin per visitor has averaged 61% over the last five years, substantially higher than the 53% margin over the previous four-year period for which I have data. Further evidence of the value of the incremental revenues is shown by the fact that revenue per visitor has compounded at 2.7% p.a. since 2008, whilst profit per visitor compounded at 6.8% p.a. from S$5 to S$9 over the same period.
Aquariums
Straco’s main assets are the aquariums that account for two-thirds of revenue and almost 90% of profits, so that’s what we’ll focus on first.
SOA opened to the public in 2002 and it’s located near Shanghai’s financial center, where it was developed for S$55mn. The company secured this prime piece of real estate land with a 40-year lease, with an option to renew. The government collects rent in the order of 6.5% of revenue, even though this means rent is scales proportionately with revenue growth, it also means that if the government is making good money there isn’t much incentive to not renew the lease.
SOA boasts ~2.2mn visitors a year. Generally, the bigger the aquarium the more visitors it attracts, but only up to a certain point. SOA has a turnover of S$65mn, which is 80% of aquarium revenues, and a pre-tax profit of S$47mn. These businesses have got inherently high fixed costs, about 85% of total costs are fixed, and so after fixed costs are covered, the marginal cost of having another visitor is basically zero. Both aquariums’ profit margins went from the high forties 10 years ago and stabilized around the low seventies for the past 5 years.
The average ticket (assuming 60% of tickets are adult tickets) is RMB 140. That’s almost 50% higher than the average price of a ticket to SOA at date of the IPO. Changfeng, another nearby aquarium, has also showed the ability to increase prices over time. Here the average ticket price went from RMB 72 to RMB 112, a 55% increase but from a much lower ticket price. This is part of the reason why SOA and UWX’s profits have grown at 14.7% p.a. since 2008.
Ticket prices for SOA are allowed to increase at a rate of around 15% every 3 years, subject to the final approval of the Municipal Price Administration Bureau. The pricing power evidenced by these parks is most likely due a few factors such as, (i) the growth in China’s GDP over the years, along with a low population growth, meant that per capita income increased a lot, (ii) 11.0% p.a. growth in the number of domestic tourists visiting Shanghai between 2005-2017 (iii) 9.7% p.a. growth in the number of overseas tourists visiting Shanghai between 2000-2017 (iv) investments in new experiences for visitors in the aquarium. The quality of tourism in China has also improved, as shown by the number of five-star hotels in Shanghai, which almost doubled between 2008-2016 and yet occupancy rates rose 24% to 68%.
The other aquarium belonging to Straco, UWX, which opened in 1999, is located on an the Gulangyu island and was bought in 2007 for S$12.7mn. Today it has a turnover of S$15mn and pre-tax profits of almost S$10mn. When the company bought it had 600,000 visitors annually, and today I estimate it has roughly 900,000 visitors. This aquarium, accessible by ferry, is about half the size of SOA and has an average ticket price of RMB 114.
In 2011, the aquarium had crossed one million visitors, however the government implemented some restrictions on Oct. 2014 on the number of tourists in certain touristic places. The ultimate goal of the government’s decision was to establish the Gulangyu island as a UNESCO heritage site. This obviously hindered the aquariums stellar track record as the number of ferries was reduced, and ultimately caused revenue to fall by about 20% from the peak.
Competition
Shanghai Changfeng Park, which opened in 1999, has an aquarium which is the main attraction within the Changfeng park, was purchased by Merlin Entertainment Group in 2012. The Changfeng aquariums is about 30min away from SOA. It is not only a smaller aquarium, covering about half the land area, but it is also not as well located as SOA, and thus doesn't benefit from as much tourist spill over as SOA. SOA is right in the middle of Shanghai's financial district and high sky scrapers - in fact it's very close to the Shanghai World Financial Center, which is one of the highest buildings in the world.
The average price of a ticket is RMB 112 versus RMB 140 for Straco. Those prices look very different compared to 15 years ago when the average ticket price for the Changfeng Aquarium was RMB 72 versus Straco’s RMB 94. Both aquariums have been able to capitalize on the rising incomes of domestic tourists - which make up the majority of visitors.
The average price of a ticket is RMB 112 versus RMB 140 for Straco. Those prices look very different compared to 15 years ago when the average ticket price for the Changfeng Aquarium was RMB 72 versus Straco’s RMB 94. Both aquariums have been able to capitalize on the rising incomes of domestic tourists - which make up the majority of visitors.
Then there’s the Haichang Ocean Park (over an hour away from SOA) and Disneyland (40min away from SOA). The former is a cross breed of SOA and Disneyland and opened in 2018 - includes roller coasters, a hotel etc. Disneyland opened in 2016. I'd say that Haichang competes more with Disneyland than with SOA. The adult ticket price for Haichang is RMB 420, 20% cheaper than Disney’s high season ticket. Disneyland had 11mn visitors in 2017, that’s half the visitors that Disney’s most popular park in Florida has.
Unlike what conventional wisdom might dictate, these parks may actually help Straco in the long run,, particularly Disneyland because of its brand and ability to attract a lot of tourists.
If I look at the biggest aquariums in the US, what I see is that even though there’s all these parks like Disneyland, Six Flags, etc. close by, the number of people going to the aquariums has actually been pretty stable over past 20 years or so. Unless an aquarium opens very close to SOA, I think it's likely that their earning power is sustained. However, it’s important to keep in mind these results are probably positively skewed. This is because aquariums that eventually closed because of theme/amusement parks get removed from the sample.
Unlike what conventional wisdom might dictate, these parks may actually help Straco in the long run,, particularly Disneyland because of its brand and ability to attract a lot of tourists.
If I look at the biggest aquariums in the US, what I see is that even though there’s all these parks like Disneyland, Six Flags, etc. close by, the number of people going to the aquariums has actually been pretty stable over past 20 years or so. Unless an aquarium opens very close to SOA, I think it's likely that their earning power is sustained. However, it’s important to keep in mind these results are probably positively skewed. This is because aquariums that eventually closed because of theme/amusement parks get removed from the sample.
The bulk of Straco’s visitors relates to the aquarium in Shanghai, and the majority of total visitors are domestic. If we look at the growth rate of domestic tourism to Shanghai and Straco’s visitor growth rate, over the last 5 and 10 years, there seems to be some correlation. In the last 5 years, domestic tourism grew 4.9% p.a. vs. the company’s 5.3% p.a., over the last 10 years it grew 12.5% p.a. vs. the company’s 10.7% p.a. growth.
Aquarium Operations (SOA 95% owned)
Revenue: 81,000,000
Pre-tax profit: 57,400,000
After-tax profit: 40,180,000
If I add back non-cash expenses and deduct capex, the aquariums earned S$59.9mn and S$62.9 in pre-tax profit in 2018 and 2017, respectively. Using a 30% tax rate and a 15x multiple on cash flow, value per share of these operations would be S$0.73 and S$0.78 per share, respectively.
Giant Observation Wheel & LCC
Singapore Flyer
The Singapore Flyer went through a myriad of issues before Straco bought it. It 75% was owned by the developer and the 25% was owned by Orient & Pacific Management. The project was formally announced in 2003 when the developer and the Singapore tourism board signed an agreement whereby the tourism board was to buy the land under which the observation wheel was going be built. The tourism board leased it to Singapore Flyer Pte Ltd for 30 years, with an option to renew. The wheel was supposed to be completed by 2005 but the developer ran into funding problems and by September of that year the project was revived after receiving S$240mn from two German banks.
By then the shareholders were an investment vehicle headed by the chairman of the company (60%), the developer (30%) and Orient & Pacific (10%). Later in 2007, the chairman acquired the developer’s share as well thereby controlling the lion’s share. By 2013 the company went into receivership. Subsequently, it went into talks with Merlin Entertainment which eventually broke down. Straco ended up buying 90% of the wheel in 2014 for S$140mn, with the remaining being owned by WTS Leisure, a private bus company in Singapore.
The Singapore Flyer is a good business, but it was poorly managed since the beginning. A number of factors contributed to this, (i) tourism agencies were given generous discounts and very favorable credit terms (ii) operators were selling their tickets to walk-in visitors which they got at steep discounts. Besides tackling the issues laid out above, Straco made other changes like (i) bulk tickets were valid for 6 months, they cut it to 1 month and (ii) insurance coverage was secured at a lower premium.
But that’s not all. The wheel – which is located in the Singapore Marina bay where the Formula One night race is held – has about 82,000 square feet of retail space. Existing rentals were paying 50% of the market rate and some tenants hadn’t paid rent for months. According to the latest annual report, the property is worth S$46mn, S$560 per square foot. It consists of a story terminal building and a 2-storey carpark.
The observation wheel did S$5.0mn in pre-tax profit on revenue of S$31.9mn last year, despite being closed for 2 months due to technical issues. A normal year should probably look more like S$40mn in revenue, with about S$10mn in profits. With a little bit of margin for maintenance down-days it has capacity for ~2.7mn visitors every year, and I estimate it receives 1.2mn visitors annually, with an average ticket price of S$25 - mostly foreigners, as opposed to SOA. The London eye has 32 capsules (as opposed to Singapore Flyer’s 28) and has about 3.5mn visitors, with a ticket price of S$60. And unlike the aquariums in China, 80% of visitor to the Singapore wheel are foreigners.
Wheel Operations (90% owned)
Revenue: 40,000,000
Pre-tax profit: 18,000,000
After-tax profit: 12,600,000
If I add back non-cash expenses and deduct capex the wheel earned S$8.8mn and S$18.7 in pre-tax profit in 2018 and 2017, respectively. Using a 30% tax rate and a 15x multiple on cash flow, value per share of these operations would be S$0.11 and S$0.22 per share, respectively. The wheel is definitely closer to being worth S$0.22 a share, the S$0.11 masks that true earning potential of the wheel considering it was closed for two months in 2018.
LCC
The cable-car is Straco’s oldest asset, it opened to the public in 1993, but the least significant one to the company, bringing in 4% of pre-tax profit. It can take 1,200 passengers per hour, halfway up the Lintong Mountain, which is a 10min drive from the famous Terracotta’s Museum which had 2mn visitors in 2002.
The number of visitors to the cable-car has increased over time and revenue has grown at 12.5% p.a. LCC’s original S$5.2mn investment paid off very well. Last year the cable-car brought in S$4.9mn in revenue and S$2.5mn in pre-tax profit.
However, Straco has owned exclusive development rights to build replicas of major historical buildings since 2001, at the original site which is exactly where the cable-car leaves visitors. The project is estimated to cost about S$20mn. And yet only in 2018 did they finally obtain approval from the provincial government to begin construction. In the prospectus management talked about completing these buildings by the beginning of 2006.
Management hoped with this project that (i) visitors to LCC would increase and (ii) price to LCC could double to include a visit to the palace. So, management assumed they could charge RMB 60 for a visit to the palace. A ticket to the Terracotta Warriors museum costs about RMB 120. What happens in the future with LCC is hard to tell. However, as of now it's such a small part of Straco's business, that investors shouldn't be too concerned about it.
LCC (95% owned)
Revenue: 4,900,000
Pre-tax profit: 2,500,000
After-tax profit: 1,750,000
Valuation
Looking at a business with a lot of non-cash expenses (depreciation and amortization) one should look at cash-flow adjusted for capex ("profit" from here on) rather than earnings. Telcos are always valued on cash flows because of the huge depreciable asset base.
The company’s market cap is S$660mn, and S$165mn is in net cash. Normalized pre-tax profit might be something like S$73mn (excluding non-controlling interests). You can buy the company today for 7x normalized pre-tax profit, adjusted for cash. Or 11x last year's after-tax profit.
What are peers valued at?
What are peers valued at?
Revenue (in $000s)
|
Debt (in $000s)
|
Market Cap
|
Revenue Growth (5yr CAGR)
|
FCF Growth (5yr CAGR)
|
Price to FCF
| |
Merlin Entertainment
|
1,688,000
|
1,300,000
|
3,870,000
|
5.8%
|
-11.42%
|
27
|
Six Flags
|
1,463,000
|
2,106,000
|
4,340,000
|
9.1%
|
4.0%
|
16
|
SeaWorld
|
1,372,290
|
1,540,184
|
2,530,000
|
-0.9%
|
-0.7%
|
16
|
Cedar Fair
|
1,349,000
|
1,663,193
|
2,800,000
|
3.1%
|
-4.9%
|
18
|
Straco
|
85,897
|
27,636
|
481,546
|
9.2%
|
8.4%
|
12
|
What multiple does Straco deserve? The key things to consider are the following:
- Sound balance sheet
- ~90% of pre-tax profit comes from two aquariums (with the majority of that being from SOA)
- Main risk to SOA would be another aquarium being built closeby
- Straco will probably be able to increase prices on SOA tickets
- Straco visitor growth seems to have some correlation to the tourism growth in Shanghai and number of tourists to Shanghai has increased at 5% p.a. over the last 4 years
- Management has a good capital allocation record
Unlike the companies listed above, Straco is first-and-foremost much smaller and in a net cash position. It has also grown FCF by 16% p.a. since 2008. Straco was the company that grew FCF the quickest, and yet it’s median price-to-FCF was the lowest at 12x over the last 5 years. Straco also carried a lot less debt than similar peers.
Really, the biggest risks to, in my opinion, are two fold. First, the group’s main assets, SOA and UWX, account for 90% of pre-tax profit. If another aquarium is built next to either one, particularly SOA - which accounts for 80% of aquarium revenues - it could have a serious impact on the company's earnings. However risky that is, I believe it's unlikely another aquarium is built close to SOA, considering it's located close to the financial center of Shanghai which is a highly built-up area. It’s also unlikely another aquarium would be allowed to be built in the Gulangyu island.
Provided occupancy is high the cost structure of the aquarium benefits the investors. Furthermore, the lack of working capital in terms inventory and receivables adds to the ability of the business to generate cash. The observation wheel, for example, was closed for two months and because of that it did S$8.8mn in earnings in 2018 versus S$18.7mn in 2017.
The Chinese tourism industry has grown a lot, partially driven by household consumption growing at 10.9% p.a.. Today the proportion of urban households in terms of the total is 58%. A dramatic change from 1990 when 75% of all households were rural households. There are many reasons to believe why the number of tourists visiting China will increase over time, both foreign and domestic, and Straco will be there to take advantage of that. Disneyland, for example, will attract a lot of Chinese people eager to experience the park.
Really, the biggest risks to, in my opinion, are two fold. First, the group’s main assets, SOA and UWX, account for 90% of pre-tax profit. If another aquarium is built next to either one, particularly SOA - which accounts for 80% of aquarium revenues - it could have a serious impact on the company's earnings. However risky that is, I believe it's unlikely another aquarium is built close to SOA, considering it's located close to the financial center of Shanghai which is a highly built-up area. It’s also unlikely another aquarium would be allowed to be built in the Gulangyu island.
Provided occupancy is high the cost structure of the aquarium benefits the investors. Furthermore, the lack of working capital in terms inventory and receivables adds to the ability of the business to generate cash. The observation wheel, for example, was closed for two months and because of that it did S$8.8mn in earnings in 2018 versus S$18.7mn in 2017.
The Chinese tourism industry has grown a lot, partially driven by household consumption growing at 10.9% p.a.. Today the proportion of urban households in terms of the total is 58%. A dramatic change from 1990 when 75% of all households were rural households. There are many reasons to believe why the number of tourists visiting China will increase over time, both foreign and domestic, and Straco will be there to take advantage of that. Disneyland, for example, will attract a lot of Chinese people eager to experience the park.
Straco built has a very well located aquarium in the heart of Shanghai. The location alone has a very significant impact on the probability of the aquarium having sustained earning power. If we assume SOA doesn't grown and can sustain S$45mn in pre-tax profit per year and a 30% tax rate, we have S$31.5mn in profit. The enterprise value is S$495mn, meaning investors are paying just under 16x earnings for a very-well located aquarium and getting the rest for free. The rest probably amounts to another S$25 in profits. All in all, investors can buy the company for approximately 10x profit.
[Note: I had previously talked about Straco's ability to increase the nº of visitors to aquariums quite significantly - basing my capacity expectations for aquariums on management's estimate of the number of people the aquarium could hold. However, after sharing the idea with another investor and a more thorough look at reviews, there doesn't seem to be much room to expand the number of visitors. This is further confirmed by looking at visitors per sq. m., which are quite high at SOA and around average for UWX.]