Future Bright - Part 2

(2) Industrial Catering

The largest integrated casino resorts employ up to 24,000 staff each and the employees live where they work. These workers are currently fed and watered by the casino's own kitchen and Future Bright is hoping to wrest that business for itself.

To that end, the company has adopted a two step strategy: (1) in November 2012, it raised $75 million via a secondary placing in order to construct a 100,000 sq ft central kitchen in Zuhai; and (2) it has sought and won contracts to provide catering at Macau’s universities, schools and hospitals that it hopes will serve as a demonstration of its competence (in terms of food safety, capacity, logistics, and cost).

These demonstration contracts contributed $18 million to Future Bright’s 2013 gross operating margin and, with the addition of full year contributions from Macau University’s Hengqin Campus and the International School of Macau, will contribute ~ $38 million in 2014.

The company expects that the economics of catering for casino staff would look something like this:

It's anybody's guess as to how many casino catering contracts the company will win: it could be zero and it could be 6. I have modeled 1 at the low end and three at the high end.

(3) Food wholesale

The company is the largest importer of Japanese ingredients and foods for wholesale to the Pearl River Delta region. 

(4) Macau rental

The company owns Yellow House, a six story building located across the way from the ruins of St Paul's Church. (St Paul's is, in tourism terms, Macau's version of the Eiffel Tower). 

Yellow House had, until January, been rented out to the Macau tourism authority at $14 million a year and is now let to Forever 21 at $28m/year. The company has reserved some space for use by its own food souvenir business discussed below.

(5) Food Souvenirs

The company has built a production plant and formed a 70/30 joint venture with Macau Yeng Kee Bakery, a recognized Macau brand with 85 years' heritage, in order to get into the business of selling Moon Cakes (and almond cookies, egg rolls, and beef jerky) to tourists. I mentioned above that it plans to retail these items from Yellow House but it has also rented store fronts in Old Macau for that purpose. However, the company (and I) expect that its restaurant network will be its most important distribution channel. 

The company expects to carve out a 3% to 5% market share for its JV which, long story short, translates into just over $16 million in margin contribution to Future Bright, a figure that one wouldn't be crazy to think grows along with both the number of visitors to Macau and the number restaurants that Future Bright operates.

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So that's the current operating business. I think it achieves at least $800 to $1,200 million in run rate EBIT in three years. 

(I've left out same store sales growth, remember, and that in itself could constitute an additional $200 to $400 million in additional run rate EBIT and would therefore be worth Future Bright's entire enterprise value. For my purposes, though, it is a buffer).

I think 10x EBIT  (or 11x earnings) is a reasonable exit multiple -- it corresponds to a 4.5% dividend at 50% payout. 

I'll talk about the Hengqin project in the next post.