Highly Cash Generative Aquarium Operator

By: Miguel Neto

• Ticker: S85
• Straco Corporation Limited, quoted on the Singapore Exchange (SGX)

Background

Straco Corporation develops and acquires assets in touristic locations, and the founder and his wife collectively own 55% of the shares, with the other big shareholder being a state-owned enterprise. As of today, they own and run two aquariums in China (Shanghai Ocean Aquarium and Underwater World Xiamen), a cable car in Lintong Mountain and a giant flywheel in Singapore. In 2018, they received 4.98mn visitors with the majority being foreigners.

Together these assets cost S$226mn, some were acquired, and some were developed. Last year they generated S$64.9mn in pre-tax profit. In the past Straco’s management – which is nimble because of the large stake the founder has – has acted opportunistically by buying or developing assets in Asia, with a focus on China. The two aquariums, SOA and UWX, help bring the point forward. If these two assets were valued as separate entities, they’d both be worth ~8 times what they cost Straco. If I take what they paid for UWX in 2007, S$12.7mn, and what it’s worth today considering it generates S$9.8mn in pre-tax profit, I get a CAGR of 20.9% on the investment.

Most of Straco’s costs are fixed by nature, about S$53mn. That means that if we take revenue per visitor of S$25, we can see that they could have much less visitors and still not lose money.

The group’s increase in revenue and profit over the last 10 years, was driven in part by the 10.7% growth p.a. in visitors, an increase in ticket prices and a higher margin on incremental revenues. Straco’s EBITDA margin per visitor has averaged 61% over the last five years, substantially higher than the 53% margin over the previous four-year period for which I have data. Further evidence of the value of the incremental revenues is shown by the fact that revenue per visitor has compounded at 2.7% p.a. since 2008, whilst profit per visitor compounded at 6.8% p.a. from S$5 to S$9 over the same period.

Aquariums

Straco’s main assets are the aquariums that account for 66% of revenue and 88% of profits, so that’s what we’ll focus on first.

SOA opened to the public in 2002 and it’s located near Shanghai’s financial center, where it was developed for S$55mn. The company secured this prime piece of real estate land with a 40-year lease, with an option to renew. The government collects rent in the order of 6.5% of revenue, even though this means rent is scales proportionately with revenue growth, it also means that if the government is making good money there isn’t much incentive to not renew the lease.

SOA has capacity for about 5.7mn people a year, yet it “only” boasts ~2.2mn visitors a year, mostly free individual travelers. Generally, the bigger the aquarium the more visitors it attracts, but only up to a certain point. SOA has a turnover of S$65mn, which is 80% of aquarium revenues, and a pre-tax profit of S$47mn. These businesses have got inherently high fixed costs, about 85% of total costs are fixed, and so after fixed costs are covered, the marginal cost of having another visitor is basically zero. Both aquariums’ profit margins went from the high forties 10 years ago and stabilized around the low seventies for the past 5 years.

The average ticket (assuming 60% of tickets are adult tickets) is RMB 140. That’s almost 50% higher than the average price of a ticket to SOA at date of the IPO. Changfeng, another nearby aquarium, has also showed the ability to increase prices over time. Here the average ticket price went from RMB 72 to RMB 112, a 55% increase but from a much lower ticket price. This is part of the reason why SOA and UWX’s profits have grown at 14.7% p.a. since 2008.

Ticket prices for SOA are allowed to increase at a rate of around 15% every 3 years, subject to the final approval of the Municipal Price Administration Bureau. The pricing power evidenced by these parks is most likely due a few factors such as, (i) the growth in China’s GDP over the years, along with a low population growth, meant that per capita income increased a lot, (ii) 11.0% p.a. growth in the number of domestic tourists visiting Shanghai between 2005-2017 (iii) 9.7% p.a. growth in the number of overseas tourists visiting Shanghai between 2000-2017 (iv) investments in new experiences for visitors in the aquarium. The quality of tourism in China has also improved, as shown by the number of five-star hotels in Shanghai, which almost doubled between 2008-2016 and yet occupancy rates rose 24% to 68%.

The other aquarium belonging to Straco, UWX, which opened in 1999, is located on an the Gulangyu island and was bought in 2007 for S$12.7mn. It has a turnover of S$15.4mn and profits of S$9.8mn. So today it’s worth about 8 times more than what management paid in 2007. When the company bought it had 600,000 visitors annually, and today I estimate it has roughly 900,000 with capacity for ~2.8mn annually. This aquarium, accessible by ferry, is about half the size of SOA and has an average ticket price of RMB 114.

In 2011, the aquarium had crossed one million visitors, however the government implemented some restrictions on Oct. 2014 on the number of tourists in certain touristic places. The ultimate goal of the government’s decision was to establish the Gulangyu island as a UNESCO heritage site. This obviously hindered the aquariums stellar track record as the number of ferries was reduced, and ultimately caused revenue to fall by about 20% from the peak.

Competition

Shanghai Changfeng Aquarium, which is the main attraction within the Changfeng park, was purchased by Merlin Entertainment Group in 2012. The aquarium is 10,000 square meters, half SOA’s size. The average price of a ticket is RMB 112 versus RMB 140 for Straco. Those prices look very different compared to 15 years ago when the average ticket price for the Changfeng aquarium was RMB 72 versus Straco’s RMB 94.

Then there’s the Haichang park and Disneyland. The former is a cross breed of SOA and Disneyland and opened in 2018. Disneyland opened in 2016. The adult ticket price for Haichang is RMB 420, 20% cheaper than Disney’s high season ticket. Disneyland had 11mn visitors in 2017, that’s half the visitors that Disney’s most popular park in Florida has. And unlike what conventional wisdom might dictate, these parks may actually help Straco in the long run, particularly Disneyland because of its brand name and its ability to attract a lot of tourists. If I look at the biggest aquariums in the US, what I see is that even though there’s all these parks like Disneyland, Six Flags, etc. close by, the number of people going to the aquariums has actually been pretty stable over past 20 years or so. Only another aquarium being built close by would affect it.

Value of Aquarium Operations

In terms of growth, that’s much more unclear to me. But if I assume (a) a 70% contribution margin on incremental revenues, (b) that 60% of ticket sold are adult tickets, which seems to be a conservative guess, (c) 15% increases in price every 3 years and lastly, (d) different levels of growth in terms of visitors, I can have a rough idea of what the aquarium operations would be worth in 5 years.

The bulk of Straco’s visitors relates to the aquarium in Shanghai, and the majority of total visitors are domestic. If we look at the growth rate of domestic tourism to Shanghai and Straco’s visitor growth rate, over the last 5 and 10 years, there seems to be some correlation. In the last 5 years, domestic tourism grew 4.9% p.a. vs. the company’s 5.3% p.a., over the last 10 years it grew 12.5% p.a. vs. the company’s 10.7% p.a. growth. I think it’s safe to assume visitors can grow at 2% p.a. Depending on whether Straco is able to raise prices or not, earnings would be between S$44-49mn in 5 years.

Giant Observation Wheel & LCC

Singapore Flyer

The Singapore Flyer went through a myriad of issues before Straco bought it. It 75% was owned by the developer and the 25% was owned by Orient & Pacific Management. The project was formally announced in 2003 when the developer and the Singapore tourism board signed an agreement whereby the tourism board was to buy the land under which the observation wheel was going be built. The tourism board leased it to Singapore Flyer Pte Ltd for 30 years, with an option to renew. The wheel was supposed to be completed by 2005 but the developer ran into funding problems and by September of that year the project was revived after receiving S$240mn from two German banks.

By then the shareholders were an investment vehicle headed by the chairman of the company (60%), the developer (30%) and Orient & Pacific (10%). Later in 2007, the chairman acquired the developer’s share as well thereby controlling the lion’s share. By 2013 the company went into receivership. Subsequently, it went into talks with Merlin Entertainment which eventually broke down. Straco ended up buying 90% of the wheel in 2014 for S$140mn, with the remaining being owned by WTS Leisure, a private bus company in Singapore.

The Singapore Flyer is a good business, but it was poorly managed since the beginning. A number of factors contributed to this, (i) tourism agencies were given generous discounts and very favorable credit terms (ii) operators were selling their tickets to walk-in visitors which they got at steep discounts. Besides tackling the issues laid out above, Straco made other changes like (i) bulk tickets were valid for 6 months, they cut it to 1 month and (ii) insurance coverage was secured at a lower premium.

But that’s not all. The wheel – which is located in the Singapore Marina bay where the Formula One night race is held – has about 82,000 square feet of retail space. Existing rentals were paying 50% of the market rate and some tenants hadn’t paid rent for months. According to the latest annual report, the property is worth S$46mn, S$560 per square foot. It consists of a 3-storey terminal building and a 2-storey carpark.

The observation wheel did S$5.0mn in pre-tax profit on revenue of S$31.9mn last year, despite being closed for 2 months due to technical issues. A normal year should probably look more like S$40mn in revenue, with about S$10mn in profits. With a little bit of margin for maintenance down-days it has capacity for ~2.7mn visitors every year, and I estimate it receives 1.2mn visitors annually, with an average ticket price of S$25. And unlike China, foreign visitors account for about 80% of the total.

Value of Wheel Operations

LCC

The cable-car is Straco’s oldest asset, it opened to the public in 1993, but the least significant one to the company, bringing in 4% of pre-tax profit. It can take 1,200 passengers per hour, halfway up the Lintong Mountain, which is a 10min drive from the famous Terracotta’s Museum which had 2mn visitors in 2002.

The number of visitors to the cable-car has increased over time and revenue has grown at 12.5% p.a. LCC’s original S$5.2mn investment paid off very well. Last year the cable-car brought in S$4.9mn in revenue and S$2.5mn in pre-tax profit.