This article was recently published on Kyith Ng's blog and is republished with permission.
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Administrative expenses were 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. I thought that the currency movement between Renminbi and Singapore dollars would allow for some currency gains, but that ended up with a slight loss, much to my disappointment. |
Maiden results from the flyer
The Singapore Flyer. Photo: CompanyIn terms of segmental reporting, there is a clear segregation between the Aquariums, which refers to SOA (Shanghai Ocean Aquarium) and UWX (Underwater World Xiamen), and Giant Observation Wheel (GOW), which refers to the Singapore Flyer. The Lintong cable car goes under "other operations".
The Flyer, which cost $140 mil to purchase is accounted as $92 mil of plant, property and equipment, and $50 mil as investment property. Instead of paying with cash, management decided to borrow $94 million to finance it.
The reason for not paying off with cash is, I believe, the more lucrative carry trade since interest income in Renminbi is much higher than that of the borrowing cost in SGD. Considering its $112 mil cash, Straco is still in a net cash position.
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The segmental data reflects 1 month of operation (see table on the right).
We do not know where the $1.98 mil one-off acquisition expense is recorded, but highly believe that it would be under 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 of previous 3 quarters of 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, operating expenses were 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, the Flyer was profitable. When I first computed 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 time take analysts' 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's 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 has not been considered, and perhaps would reduce cash flow in the short term.
Thirdly, we have seen many changes in the past one month. A few tenants seem to have moved out and perhaps some tenants came in. Since we are aware that the past rents were below market rates, and occupancy was not at full capacity, there is room for improvement but also short term impact as tenants move out and new tenants need time to renovate the place.
Aquariums
@ Shanghai Ocean Aquarium. NextInsight file photo.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%)
The arapaima fish @ Shanghai Ocean Aquarium. The fish originated in the rivers and lakes of the Amazon basin and is one of the largest freshwater fish in the world. NextInsight file photoQ3:
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 accounted for a huge proportion of revenue and you can see the crazy growth there in comparison to the other quarters. In the past 2 years, intra-China tourism took off in a big way and has been a good thing for Straco. The Q4 change in visitors was very small but as you can see from the data you cannot draw a conclusion that just because this quarter the result was lukewarm, the next few quarters will be as such too.
Competition in China
We are not sure whether the purchase of the Flyer is a response but 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 attracting more tourists to Shanghai. The Disneyland 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, which is scheduled 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 rank on TripAdvisor) and Pearl Tower.
If there is one theme attraction that should be more worrying, it has to be the current attraction in Shanghai -- Happy Valley. It is ranked No. 17 on TripAdvisor (as compared to SOA which is ranked 33).
I think that Disneyland will attract more tourists to Shanghai and this would be complementary to SOA. However, the positive impact would be balanced off by losing some of the crowd to these more interactive places.
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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 does not provide a margin of safety. 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, which were 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 become a threat, then a sell decision seems a more suitable course of action. |
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Comments
FY2014
Segment PBIT
Aquariums - 62,694
GOW - (598)
Others - 1,198
total - 63,294
PBIT as P&L - 57,641
Diff - 5,653
FY2013
Segment PBIT
Aquariums - 49,010
Others - 2,668
total - 51,678
PBIT as P&L - 50,270
Diff - 1,408
Go figure where are those one off items being recorded in segment P&L.
Straco pretty much shout out where they dump those number.
Straco group structure say it might more than just a simple carry trade.