Future Bright: A Macau Restaurant Operator with Restructuring Potential
Member Write-up by André Kostolany
Future Bright is a Macau-based restaurant operator with a fascinating history of management missteps. Today, Future Bright’s main businesses are Food & Catering, Souvenirs and Property. The company is primarily owned and run by Chan Chak Mo, a local Macau legislator with deep roots in the region and connections to the casino operators. The company’s market cap is about 600MM HKD, it has 75MM of cash and about 350MM in debt. While some of my comments may seem offhand, I have been following this business for over five years.
In Macau, Future Bright runs an easy, toll-road like business built on cash flows from in-casino restaurants, university canteens and other near captive customers. During the good times in 2011, high-rollers easily spent >$200 for a quick meal in between gambling and the core business threw off >30% EBITDA margins. Then Xi Jinping came into power and the anti-corruption campaign happened in 2012. Less high-rollers frequented Macau, instead, they were replaced by tourists with more moderate budgets. In response, Macau attempted to transform itself to a more ‘family-friendly’ destination. While Macau visitor numbers have been consistently growing at a rate of ~7% per annum for the past 10 years, average meal spend per visitor has dropped below $100 due to the shift away from high-rollers, impacting restaurant margins.
When the anti-corruption campaign was announced, management began investing into opening up restaurants in competitive restaurant markets overseas. They have recently admitted failure in Mainland China and are closing down some of these restaurants. They are doing fine in Hong Kong and the judgement is still out whether their Taiwanese restaurants will perform. None of these new restaurants will, however, approach the economics of their existing core business in Macau.
The core restaurant business in Macau is mainly a good business because casinos need higher-end restaurants to accommodate their customers but have shown little willingness to fully manage and operate these themselves. With its experience in managing a wide range of Japanese, Chinese and Western Restaurant concepts Future Bright is a useful partner to the casino operators. Casino visitors are also relatively less price sensitive than your typical restaurant customers, which has led to Future Bright’s unusually high margins on its core business.
Future Bright currently runs 61 restaurants, 4 of which are food court counters. 16 of these restaurants have been opened in the past two years and they are currently planning on opening another 20 restaurants by the end of 2019. As restaurants take about 2 years to reach maturity, and as they are currently spending to shut down overseas restaurants, the restaurant divisions’ economics are currently somewhat obscured. Adjust for one-off charges and annualizing current numbers, one can see that the restaurant division has about 970MM in revenues and is producing an 8% cash margin. Macau restaurants have a cash margin of 14%, Hong Kong 6% and China -22%. While the division currently produces 80MM of cash flow, getting China back to breakeven would increase cash margin to 105MM. On a 10x multiple the division would be worth between 800MM-1,050MM HKD. We’ll go with the lower end for the purpose of this valuation.
Food Souvenir Business
Entering the Food Souvenir business looks to have been the Future Bright’s largest mistake over the past few years. Bringing back food souvenirs from travels is customary in Asia. However, Macau already has two dominant food souvenir businesses and, in spite of trying to break into this area through spending on advertising and opening up bakeries since 2013, this division has yet to generate a profit. Their own brand, the Yeng Kee bakery is simply not catching up with the more established brands in terms of popularity. Losses have been a decidedly uninspiring –26MM HKD over the last 12 month period. Although losses from this division have been falling over time, I wouldn’t count on it breaking even. Management has been commenting that they are looking for ways to grow the food souvenir business in a more sustainable (meaning less money-losing) fashion. I don’t think they will throw more good money after bad at this point, but neither do I think that the profitability drag is going away unless management decides to exit this business. 10x -26MM gets me to a valuation of -260MM HKD for now.
Future Bright owns Yellow House, a large centrally located retail property in Macau at the foot of the Ruins of St. Paul’s (https://email@example.com,113.540849,3a,75y,94.42h,102.71t/data=!3m8!1e1!3m6!1sAF1QipMIEVaUQMuduaB04JpLYhTjUtjCQp-Vlgd1ML9t!2e10!3e11!6shttps:%2F%2Flh5.googleusercontent.com%2Fp%2FAF1QipMIEVaUQMuduaB04JpLYhTjUtjCQp-Vlgd1ML9t%3Dw203-h100-k-no-pi-0-ya87.78446-ro-0-fo100!7i12000!8i6000 )
While they had been renting the property out to Forever 21, the lease expired in 2017. Future Bright has been looking for a new tenant but has been unable to find a single large tenant to replace Forever 21. The main solution being considered at this point is dividing up the space and renting it out to two separate tenants. This is truly a valuable property, so I am relatively confident that Future Bright will find one (or two) new tenant for this location sooner rather than later and that rental income will support the current book value of Yellow House at 505MM HKD.
Finally, Henqin Land is a property that Future Bright began developing in 2015. The debt on Future Bright’s balance sheet is associated with the development of Hengqin Land. Future Bright’s original intention was to develop a large Food Court on the Hengqin Island near Macau to service the newly opening campus of the University of Macau as well as new businesses opening in this area. Due to construction overruns and delays, this plan is still far from coming to fruition. Future Bright has instead decided to either fully dispose of Hengqin Land or sell a partial interest to a real estate developer who can help pay for the completion of the project. Hengqin Land is on the books at 462MM HKD. I think at the very least Future Bright should be able to pay down the 350MM HKD of debt associated with the proceeds from disposing the project. As I don’t want to associate any value with this speculative project, I value Hengqin at 350MM HKD for the purposes of this write-up.
Summary & Valuation
In summary, the restaurant business is worth 800MM HKD, Food Souvenirs are -260MM HKD and the property business is worth 855MM HKD. Net of -350MM of debt and 75MM of cash we arrive at a total equity value of 1,120MM, about 90% higher than current market value of about 1.61 per share. One could come up with a far higher valuation if management decided to act in a value maximizing manner, shut down the food souvenir business, sell Hengqin Land and stop opening restaurants outside of Macau and Hong Kong. From communicating with them over the years, I get the feeling that for now at least they are focused on correcting the excesses and experiments of the past few years. For what it’s worth there are several new mega casinos coming online in Cotai (part of Macau) that should provide ample opportunity for Future Bright to expand inside Macau where they actually have a competitive advantage should they play their cards rights. This has historically not been a management that has ‘nailed it’ on capital allocation at all, but at the current valuation, all they have to do is shut down some restaurants in China, find a new tenant for Yellow House and monetize Hengqin for the stock to move closer to intrinsic value.