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Straco Corporation Limited (SGX: S85)



Recently, my screener (find out more via the tabs above) identified Straco Corporation Limited ("Straco") as a potential investment. The screener considers this company as one that has the promising combination of being cheap and possessing a good ability to generate returns on its invested capital.

Straco is currently ranked 3rd on my list. It has an earnings yield of 11.1%, and a return on invested capital of  61% as of 3rd Feb 2018.

Business Description: Straco Corporation Limited ("SCL") was listed on the Mainboard of the Singapore Exchange on 20 February 2004. Since then, the Group has been one of the first few foreign companies that have managed to build up significant presence and influence in the tourism industry in China. The Group showcases high-quality tourism-related projects, incorporating entertainment, education and culture to create a unique experience for visitors and audiences. These projects include giant observation wheels, large-scale public aquariums, cable-car facilities, the protection and redevelopment of historical sites.

The business model is simple. They own tourism-related assets, and their main form of revenue is derived from ticket sales as well as rental leases to restaurants etc. (SGD 81.5mn in FY16).

Their main revenue is generated by Shanghai Ocean Aquarium and Underwater World Xiamen. The 2nd largest revenue segment is, surprisingly, generated by the giant observation wheel which is non-other than our very own Singapore Flyer (SGD 40.3mn in FY16).

Straco also has a couple of other business including Lintong Lixing Cable Car, the development rights to Chao Yuan Ge (CYG) -- which is located at the alighting point for the Lintong Lixing cable-car -- and has obtained exclusive permission from the State Administration of Cultural Heritage of the PRC to display relics unearthed from the CYG site on Lishan Mountain (SGD 3.3mn in FY16).

I did a rough calculation of the utilization rate of the Singapore Flyer and I got an approximate value of 25% (assuming all the revenue was generated by ticket sales). This indicates that the asset (Singapore Flyer) has the capacity to take in more customers.

Investment Thesis

Revenue of Straco will increase if there are more tourists visiting the attractions. On top of that, it has the power to increase the prices of tickets. Given that the majority of the customers are tourists, demand is relatively inelastic which is good news for the business (and investors).

Singapore has seen an increasing number of tourists over the years, with visitors from China being one of the largest segments. According to Singapore Tourism Board, the number of tourists visiting Singapore increased 6.4% YoY for the 11 month period Jan - Nov 2017 vs Jan - Nov 2016 (Source).

According to Ctrip, it sees a future surge in new Chinese passports which will result in a tourism boom. "The head of China’s biggest online travel service is predicting the number of passport-holding citizens will double to 240 million by 2020, a trend that could fuel an explosion of mainland tourists exploring the world." (Source)

The balance sheet is also healthy with a positive net financial position of SGD 136.2mn as of Sep 2017, with enough cash to cover all its debt obligations. The current ratio is at 6.2x indicating that it has to ability to meet short-term liabilities with short-term assets. Cash conversion cycle is at negative 260 days which means it receives cash before needing to pay out in terms of working capital.

Overall, I see potential in this counter and will continue to monitor it. I intend to add two new counters to my portfolio towards to end of the 1st quarter 2018 (I will consider adding Straco). I also intend to liquidate some of my positions from my legacy portfolio soon in order to free up some capital for future purchases using my new methodology. Do subscribe to stay up to date with my blog posts. Additionally, you can check out my portfolio and its performance at the top of the blog.

Best regards,
Darren

Comments

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