Straco Corporation - DBS Research 2016-06-15: Small Mid Cap Explorations

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STRACO CORPORATION LIMITED S85.SI 

Straco Corporation (STCO SP)

• Straco Corporation is a Singapore-headquartered developer, operator and investor of tourist attractions such as the Singapore Flyer and Shanghai Ocean Aquarium, among others. With the opening of Shanghai Disneyland in June 2016, we think that the Group’s attraction in Shanghai could benefit from a spillover of tourists. 
• Currently in a net cash position, and with strong cash generation, the Group is well poised to embark on further acquisitions to drive future growth. 
• Earnings have grown at a CAGR of 19.8% over the last three years, and the stock is currently trading at a valuation of 13x FY16F PE, which appears reasonable, especially if the Group can continue to deliver firm profit growth.

• Listed on the Mainboard of the SGX on 20 February 2004, Straco Corporation has since built up a significant presence in China’s tourism sector - developing, operating and investing in projects in Shanghai, Xiamen and Xi’an. Building on its strong track record in tourist attractions, Straco acquired the Singapore Flyer in November 2014. The Group’s current projects include:
  1. The Singapore Flyer (“Giant Observation Wheel”), which is the Group’s flagship project in Singapore. Launched in 2008, it is one of the world’s largest Observation Wheels standing at 165m tall. Visitors can enjoy panoramic views of the Marina Bay and city skyline with glimpses of neighbouring Malaysia and Indonesia. This attraction generated revenue of S$38m in FY15, which represented c.29% of the Group’s revenues for 2015.
  2. The Shanghai Ocean Aquarium is the Group's flagship project in China and one of the most popular major attractions in Shanghai, with more than 1m visitors every year. Built at a cost of US$55m, it has a total built-in area of 20,000 sqm that can house up to 21,000 people a day. Located right next to the city's iconic landmark, the Oriental Pearl Tower, the aquatic facility showcases over 10,000 fishes from over 450 different aquatic species all around the world and has been accredited as a National Municipal Education Base by the local authorities.
  3. Underwater World Xiamen is another aquatic facility belonging to the Group. It has a capacity of 5.8m litres of water and is home to a wide array of fresh water and marine livestock. Located on the scenic Gulangyu Island, it provides a magnificent backdrop to the marine animal shows that entertain visitors daily.
     The bulk of Straco’s revenues are derived from China- based attractions. In 2015, the aquariums collectively contributed S$87m, or about 68% of total FY15 revenue.
  4. The Lixing cable-car service which is located at the scenic Mount Lishan Xi'an, measures up to 1.5km in length. This project was a pioneer in Western China in building a cable-car service of international standards that offers a spectacular view of the mountain and its surroundings. The cable-car ferries visitors from the base to the mid- level of the mountain where Chao Yuan Ge ("CYG").
  5. Straco also owns the development rights to CYG, an integral part of the restoration project for the grand "Hua Qing Palace". The preliminary development concept for the CYG project showcases the unique culture and architectural features from the Tang Dynasty period through reconstructed replicas of its major buildings.
• China National Tourism Administration (CNTA) reported that China’s domestic tourism has been growing at 10% p.a. over the last five years, and accounted for more than 70% of the country’s tourism market in 2015. The steady growth in domestic tourism was largely driven by a growing middle- class population with higher disposable incomes.
  
  According to the Discover China’s Emerging Middle Class survey released by ZenithOptimedia, China’s emerging urban middle-class population totalled 125m in 2012, and is expected to reach 356m by 2020, which provides robust growth prospects for its domestic tourism sector. We believe that prime beneficiaries to this secular trend would be tourism plays with a strong presence in iconic and well- connected destinations such as Beijing, Shanghai and Xi’an.
• Expected to draw at least 10m visitors p.a., the launch of Disneyland in Shanghai this June could catalyse visitor growth at Straco’s Shanghai Ocean Aquarium, as we will likely see a spillover of Disneyland-bound tourists to surrounding attractions and cities.
• Meanwhile, we continue to see weakness for Underwater World Xiamen, which has had a challenging year as local authorities imposed restrictions to limit the flow of visitors to Gu Lang Yu, as part of their efforts to secure a UNESCO World Heritage status for the site. However, interim measures undertaken by the Group to mitigate the lower visitor traffic (i.e. extension of operating hours) could provide some relief.
• The Singapore Tourism Board (STB) projects 0-3% expansion in visitor arrivals, or between 15.2m to 15.7m arrivals for 2016. However, YTD (January to April 2016) tourist arrivals in Singapore, fuelled by a spike in visitors from key source markets China and Indonesia, have increased by about 14.1% y-o-y to 5.53m, which indicates firm growth momentum. Ranked as the top landmark in Singapore by visitors (based on polled rankings on TripAdvisor), we believe that the Singapore Flyer should see good growth ahead as it is well positioned to feed off the higher tourist numbers.
• Risks include: 
  1. Straco has pledged that it will not be adjusting ticket prices for its attractions in 2016, and its ability to revise prices in 2017 and beyond will be subject to approval from the Price Administration Bureau, 
  2. Potential competition from the upcoming fifth generation world-class Shanghai Haichang Polar Ocean Park that spans over 190,000 sqm which is scheduled to open in 2017, and 
  3. Terrorism remains a threat to tourism plays – including Straco’s attractions, given the ramifications it can have on traveller sentiment and tourist arrivals.
• Straco’s earnings have grown at a CAGR of 19.8% over the last three years. Currently trading at 13x FY16F PE (based on consensus estimates), we think the Group’s current valuation is reasonable, especially if it can continue to deliver firm profit growth. Further, given the Group’s net cash position of c.7.2 Scts per share, coupled with its strong cash-generation capabilities, we believe that Straco is well poised to embark on further acquisitions to drive its future growth.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2016-06-15

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