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Straco reports full year net profit of $19.73 million

• Proposed first and final dividend of 0.75 cent per share + special dividend of 0.50 cent per share
• Debt free since 2008
• Operating cash flow of $27.52 million generated and cash balance increased 16.8%$file/Straco4Q12results.pdf?openelement [SGX Announcement]$file/MediaRelease_4Q2012.pdf?openelement [Press Release]

I am a little surprised that a thread for this company wasn't created yet. Quite pleased with the recent results with revenue and net profit making new highs with both top and bottom line growing by 20%. While organic growth potential remains strong, the real kicker will come if it chooses to deploy its massive $95 million cash hoard in acquiring / developing tourism infrastructure assets in China. The Company isn't trading at typically cheap valuation - PER of 12.6, Net Cash compromises 39% of market cap, P/B 1.85 and dividend yield of 4.3%. The free float is low as the Singaporean Executive Chairman has 56% stake and the China Poly Group (a SOE) owns 22% stake in Straco resulting in low trading liquidity. While, the Group has an excellent history of growth, its main assets - Underwater World Xiamen and Shanghai Ocean Aquarium - are its main source of income so there is little diversification in revenue stream.

Hi Nick,

Thanks for the summary.

Who are Straco's main competitors in this space, in terms of looking out for good assets to buy? I'd expect that if good assets could be bought at low valuations it will not be just Straco eyeing them.

Also, what are the chances of Straco being able to deploy their cash hoard for accretive and strategic acquisitions? Are there theme parks or tourist attractions out there which they are eyeing? Did Management communicate on their planned area of focus or target "search area" for such assets? How much is intended to be reserved for such acquisitions and how much would it contribute to bottom line and cash flows?

To address a potential risk factor - what would cause visitor numbers to dip in their current two main attractions? Is this macro-sensitive or tourism-sesitive or is demand mainly domestic? Or do they foresee that visitor numbers will increase from current levels? In other words, is there organic growth potential, perhapsfrom AEI (a buzzword I got from REITs hahaha)?

> the real kicker will come if it chooses to deploy its massive $95 million cash hoard in acquiring /
> developing tourism infrastructure assets in China

Many of the tourist attractions in China are cash generation machines. That's why the Shaolin temple at one stage chose to go IPO. I dont think it is easy to acquire other attractions unless they pay a high price for it.
You might want to check out this article, might be able to clarify some of the queries:

I thought the earnings looked quite good, with special dividends. Still no news regarding the Xi'An project. Market is a little muted though.

China domestic tourism revenue in 2012 exceeds 2 trillion yuan
Hi MW,

Since its listing in SGX in 2004, the Company has only made 1 major M&A - acquiring Underwater World Xiamen for $12.33 million in Sept 2007. In FY 2006, the asset generated NPAT of $1.9 million so it was a pretty decent buy. Going forward, the asset enabled Straco aquarium division results to surge dramatically with PBT increasing from $14.5 million in 2008 to $31.7 million in 2012. This is attributed to rising visitor level (the Underwater World Xiamen had seen visitors increasing by over 50% and higher ticketing price). Unfortunately, this was the sole major M&A in this period highlighting the difficulty of acquiring excellent assets in China.

At the moment, competition is minimal since there was no drop in visitor numbers despite Shanghai Ocean Aquarium raising its ticketing price from its initial RMB 110 million to RMB 120 million to RMB 135 million and currently to RMB 160 million. UWX had also increased its fees in 2010. I don't think this would be possible unless the aquarium is well equipped to 'wow' its visitors with unique attractions. We cannot rule out possible future competitions.

I suspect it will be difficult to acquire a matured aquarium or tourism attraction due to its high cash-flow except in a special situation due to excessive leverage etc. I think it is likely that future inorganic growth will come from developing a tourist attraction from scratch. This could be done through a joint venture with its partner - China Poly Group - a Chinese SOE with a division focusing on Culture & Arts. The SOA was developed as a joint venture between the two companies over a decade ago. The Chairman of China Poly Group sits on Straco board which highlights the relationship between the 2 companies. Recently, the Management has highlighted in the Nextinsight article that their long deferred project to develop Hua Qing Palace near their cable car base (very small revenue generator) to display Tang Dynasty relics will commence. They intend to spend US$8 million to develop it by 2015/16. This was initially planned to be completed years ago but stalled with land acquisition issues resulting in just the cable car division operating by itself albeit profitably. Granted, if no M&A is possible - we cannot rule out the possibility of special dividend or share buy-backs. In FY 2012, the Company increased its treasury shares by repurchasing a net 18.005 million shares from open market reducing its share float to 842 million shares.

Since this is a tourism based asset concentrated in Shanghai and Xiamen, a decline in tourism level to these cities will hurt it greatly. At the moment, the bulk of the tourist are domestic tourist ie Chinese citizens from other provinces visiting these attractions. A major risk would be an infectious disease like SARS reducing the visitor level drastically. Alternatively, foreign theme park may choose to invest in China with assets of superior quality resulting in Straco to incur heavy capex to keep up. Another possible risk factor albeit an internal one would be the Management deploying the cash hoard in unprofitable or unrelated business ie property market etc.

Reportedly 95% of visitors are local tourists and a first time visit. In their recent report, "Combined visitation to our Group’s major attractions was 506,000 visitors for the quarter, an increase of 11.2% compared to 4Q2011." That will translate to 2M annually.
I think this figure is sustainable as China's population for one province alone albeit most populous, Henan is already 100 million. There are 22 provinces.

Nick, I've visited the Shanghai aquarium last year. The location of the aquarium is superb. Just next to the pearl tower and a big shopping complex. It was quite crowded on a Saturday.

In terms of comfort and design, i think it cannot compete with Sentosa's oceanarium. I read reviews of foreign tourists from, some are quite disappointed with the design. But, i believe it should be good enough for local visitors.
The IPO prospectus states that the designed capacity of Shanghai Ocean Aquarium is 21,000 visitors a day, and the built-up area is 20,000 sq metres. The existing fee of RMB 160 seems very high. SOA's profit can rise if it can admit more without overcrowding.
STRACO CORP: After another solid year and a bigger cashpile, will there be M&A? [Nextinsight]

The article highlights the difficulty in growing inorganically in China.

Straco reports strong earnings for 1Q2013 [SGX Announcement] [Press Release]

Straco contains to grow rapidly with core PBT soaring 75% in a seasonally slow quarter. This is attributed primarily to the 25% growth in revenue and 22.5% increase in visitors to their aquarium attractions. The Group B/S remains strong with $101 million cash with no debt and this works out to 12.0 cents per share. The Management has been repurchasing shares and increased its FY 2012 dividend from 0.75 cents to 1.25 cents. Unless a major M&A is completed, I hope the Management will again increase the dividend in FY 2013. Nothing is without risk - the bird flu crisis in China may hamper the visitor numbers to their attractions and if the crisis continues to escalate, it is likely Straco operating performance will dip this year.

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