Straco Corporation (STCO SP)

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Straco Corporation (STCO SP - US$300 million) is a Singapore-based developer of tourism assets.

The stock is illiquid and can probably only be purchased for personal accounts. But I wanted to mention a few words about Straco given that I own the stock myself, in a personal pension account (known as “CPF” in Singapore).

Straco was started by businessman Wu Hsioh Kwang, who moved to China in the 1980s and saw the country's potential early on. The company developed a cable car system in the 1990s and partly through the backing of Singapore sovereign wealth fund Temasek, it developed an aquarium in Shanghai and made several other acquisitions.

Today, Straco owns four key assets:

1. Its flagship asset is a large-scale aquarium in central Shanghai called the Shanghai Ocean Aquarium
2. An aquarium on Gulangyu near Xiamen in China’s Fujian province called Underwater World Xiamen
3. A cable car up Lishan Mountain near Xi’an in China’s Shaanxi province
4. And finally, it owns the iconic Ferris wheel Singapore Flyer

In my view, these assets are almost irreplaceable. The two aquariums are in the middle of Shanghai and Gulangyu. Singapore Flyer is just a few hundred meters from the popular tourist attraction Marina Bay Sands. Lishan Mountain is the site of the famous Terracotta Army Museum, which has significant cultural significance.

There is some growth potential in all of these assets. Before COVID-19, domestic tourism in China grew by over 10% annually. Inbound tourism to Singapore grew by about 6% annually. Those are decent numbers. And with high incremental margins, additional visitors should contribute significantly to the bottom line.

The main problem for Straco in the past few years has been COVID-19. All of Straco’s assets shut down during the pandemic. And it was only by 2023 that they truly started to recover. While tourism to Singapore is still 20% off its pre-COVID levels, the numbers are trending in the right direction.

Straco’s management team sees particular potential in the Singapore Flyer:

• In 2019, its operating margin was only 16% vs 71% for its aquariums. In other words, it was still under-earning.
• While the visitor numbers have not been disclosed, I believe they were just north of 1 million per year in 2019, compared to total capacity of 7.3 million.
• Straco has the option to continue leasing the land under the Flyer until 2049.
• It’s also working with the government and third-party companies to redevelop the terminal building to make it more attractive to tourists. I think the asset’s key problem has been weak foot traffic in the immediate surrounding areas. But that could change with redevelopment and clever marketing.

In a full-recovery scenario, the stock would trade at a P/E of 10x and an EV/EBIT of 5x. With pre-pandemic free cash flows of almost SG$50 million and an enterprise value of SG$309 million, I see a free cash flow yield of about 14%.

Some investors complain about the build-up of cash on the balance sheet. But Straco has historicalled allocated capital intelligently. Prior M&A has been successful. For example, it bought the Singapore Flyer at almost half its replacement cost. Straco has been generous with dividends as well.

While the parent shares the name “Straco” with the ListCo, I haven’t found any related party transactions or similar issues. There are minority interests in the Singapore Flyer, Shanghai Ocean Aquarium and the Lintong Lixing Cable Car, however, and I have not been able to identify who they are.

Another issue is concession renewals. Straco’s two aquariums in China will see their leases expire in 2034 and 2037. It’s still unclear whether these leases can be renewed and at what cost.

Investors are also concerned about the low maintenance capex spent by Straco throughout the 2010s. An incident at Singapore Flyer in 2018 and a technical issue in 2022 are evidence of mismanagement. I’m not so sure the low maintenance capex will cause much problems in the future. The Singapore Flyer had interruptions in 2008 and 2010 － even before Straco acquired the asset in 2014.

I believe that the company’s 2023 earnings will be strong. China’s domestic tourism is on fire, and Singapore is, according to several surveys, the top destination for Chinese travelling overseas. I also look forward to higher ticket prices at the flagship Shanghai Ocean Aquarium. And a potential refurbishment of the Singapore Flyer that will take the asset closer to its full potential.

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