Straco Corporation

CIMB Research, Feb 5

STRACO operates two ocean aquariums in China. We initiate coverage on Straco with an "add" rating as its tourism assets can benefit from the rising domestic consumption and demand for tourism in China. We also like the company for its strong cash-generative ability and the prospects of higher operational efficiencies through stronger sales volumes.

We use a DCF (discounted cashflow) valuation to derive a target price of S$0.60, which implies 13.9 times CY2015 PE.

We see strong potential catalysts from: 1) China's domestic consumption policies, 2) improved accessibility in China via new railway networks, 3) stronger visitor arrivals in Shanghai from the opening of Shanghai Disneyland and the Shanghai FTZ, 4) the upgrading of an existing aquarium, and 5) the opening of a new tourist attraction.

China's government has been shifting its economic reliance away from exports and foreign trade to domestic consumption. This directly benefits the Chinese tourism industry.

According to the World Travel & Tourism Council, tourism accounted for 9 per cent of China's GDP in 2012, and the tourism industry is expected to expand by more than 9 per cent over the next 10 years, faster than the economy's growth rate.

In 2010-12, the number of domestic tourist arrivals expanded at a compounded annual growth rate of 18.6 per cent while per capita expenditure on domestic tourism grew by 13.3 per cent. We expect this strong growth trend to continue as the demand for tourism rises with the nation's increasing affluence and accessibility.

About 80 per cent of Straco's operating expenses comprise fixed costs, which means that the company can capture operational efficiencies through higher sales volumes.

We expect Straco's net margin to expand from 35.7 per cent in 2012 to 47.2 per cent in 2016, given the strong visitor arrivals across all its three attractions.

Straco has the ability to generate very strong cash flows, as its business has little maintenance capital expenditure (capex) and working capital needs. The major capex is typically forked out upfront, whether for the development of a new tourism asset or the acquisition of an existing asset.

Straco has not had any debt on its balance sheet since 2007. As at Q3 2013, it has S$101.1 million worth of cash and equivalents.

This translates into net cash of S$0.12 per share, or 26.7 per cent of its current share price. Cash makes up 27.8 per cent of our S$0.60 target price.

ADD