Saturday, July 26, 2014

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.

--

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.

70 comments:

  1. Russian stocks have gotten massacred. Wondering if you look at that market, fishing for cheap stuff? :)

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  2. The idea that one actually owns assets in Russia is a proposition yet to be proved. I'd rather own a bank in Lagos, frankly :)

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  3. Hey red Check out this company

    http://seekingalpha.com/article/1283141-monotypes-growth-strategy-is-working

    Seems like a special situation type thing. Could add another 500 million$ in very high margin revenue over the next years. Plus management are good capital allocators.

    Sort of risky, but an interesting stock. Similar business as Moody's, except this time with fonts instead of bonds.

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  4. At *some* price, everything becomes a great buy. :)

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  5. Prasanna - that would be true only if equity is never wiped out.

    ---

    anon -- thanks for the link

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  6. Or if the equity will not be wiped out with less than 100% certainty and the trading price is a big fraction of the wipe-out scenario :)

    But apart from the banks, is it all too common amongst the smaller russian names? I frankly just do not know much, and hence curious..

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  7. Correction: I meant to say, trading price is very small compared to the "probability of no wipe-out" weighted "value in the non-wipe out scenario".

    Of-course you know that.. I just couldn't edit my previous comment. :) Cheers

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  8. Red,
    What are your thoughts on the net profit margins? Do you think they are sustainable... @ 15%-21% they seem extremely high for such an industry.

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  9. The premise of the idea is that the company is not an ordinary restaurant co, so yes, I think the net margin is sustainable.

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  10. This is called getting lost in the details and losing perspective. Future Bright's prospects are greatly correlated with VIP rather than Mass. And it is VIP that has been struggling and will struggle more as the ginormous property bubble burts - which is inevitable, the question is only when. And it is all linked. You are going long VIP in the part of value chain that generally has mediocre economics. Maybe you win, maybe you don't. But going long a bubble is not prudent investing.

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  11. This is factually & logically wrong with at least one non sequituur thrown in. But then, that's why there's a market, isn't it?

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  12. haha this is easy to check, VIP gambling went from flat to going down this year. And yet FB is growing rapidly (and growing $/sqft)

    I also notice that most of the time these statements are made with strong emotional language that indicate very black and white thinking.

    Is there going to be a part 3 red?

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  13. I want to say, in addition, that I don't object to -- nor want to discourage -- criticism of my longs. Quite the opposite. Honestly.

    But it is tiresome when people assert things that they would know to be false after only five minutes of educating themselves on the topic.

    And it is a particular peeve of mine when a knowing, faux sophisticated style -- "going long VIP", "part of the value chain", "mediocre economics" -- attempts to hide the vacuity and baselessness of the content. It's embarrassing.

    But I do want to reiterate that this is a blog, not a private diary. And I blog because I welcome honest commentary & criticism.

    Some of my ideas (including this one) may be downright stupid, my facts wrong, my arithmetic FUBAR. And, in fact,I've had more than a few comments correcting me on these over the last two years and I've appreciated it a lot.

    ---
    "Is there going to be a part 3?"

    Yeah,I'll wrap it up this weekend before talking about some other stocks.

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  14. Hey red, what do you think of Altisource ? Looks really really cheap now with all that regulator stuff looking way overblown. Seems like a classic special situation where panic prices a great company like it will go in decline.

    All of Erbey's companies also seem to get very irrational hate on sites like seeking alpha given that they seem best in breed servicers.

    And another one that is similar but looks cheaper to Keck seng is Shun Ho resources.

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  15. Sun Ho looks interesting. Not sure how I've missed it up to now.

    I'll see if I have brain cells enough to work through Altisource.

    Thanks for the heads up

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  16. Hmm, ok. Zero respect for minority shareholders at Shun Ho.

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  17. you are hilariously stupid. Maybe if you run a regression of Half yearly sales growth of FB against VIP GGR and Mass GGR going back last 7 years you'll see what I meant. The R-sq against VIP is nearly 2x that versus Mass. You don't even need to do that, just look at the price points. The ASP of 1000 in many of its restaurants, that's more than 2.5x the average F&B spend per visitor in Macau. You would be funnier if you weren't so arrogantly stupid and childish.

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  18. Hey Red,

    Where did you get your number for 24K workers per Casino. I found that there were only 44K gaming employess in 2006. There are obviously more now but 3 casinos at 24K a piece would probably be a good size of the whole industry. Perhaps it doesn't include hotel stuff too...

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  19. Thanks for looking into this, Cameron.

    gaming = hotel + 1/3 xretaurant labor = ~107k casino employees
    see, for example:http://mlvonschaper.wordpress.com/2013/10/15/macau-the-difficulty-to-find-accurate-employment-figures-for-the-gaming-industry/

    28,000 casino-hotel rooms at start of the year, so say 3.8 employees/room

    Now, there's going to be variation by hotel size and type but take Sands Cotai Central:

    3.8 x 6000 rooms = 23K employees

    Large casino/hotels are obviously the target for FB's industrial catering ambitions so that might be a representative number.

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  20. Hi red,

    Any clue as to what's causing the volatility in FB share price in the past week?

    Thanks,

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  21. I suppose it is dumped by the market along with Macau gaming stocks on disappointing GGR figures

    http://www.dicj.gov.mo/web/en/information/DadosEstat_mensal/2014/index.html

    Chris

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  22. the future is bright!! the red head doesn't know the difference between VIP and Mass and he talks of a 5 bagger here. The future is bright!!

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  23. Where do you get ASP of 1k HKD? Or is that MOP?

    You say that growth is related to VIP. But If I look up regular baccarat growth, they grew faster then VIP. And this is with 3x higher margins for casino's. Because they do not lose on very expensive room, helicopter flights and junkets.

    And it seems usually partially or most of the food is comped in casino's, even for the non VIP gamblers.

    Also when looking up prices I see them to be mostly in the 20-80 EUR price range.

    And it seems with infrastructure improvements mass market will only increase?

    Also you do not factor in catering operations for the staff, which is not related to VIP.

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  24. Property collateral of junkets --- property bubble bursting --- junket get margin calls --- VIP collapses further --- Future bright!!! heading for 2sss

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  25. And the sequel looks like this:

    Alien invasion - Nuclear war - THE MACHINES TAKE OVER - CHRIST COMING BACK - THE EARTH IS IN FLAMES - Future bright alright.

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  26. Clearly there is some panic with free fall in GGR (analyst chatter is that Sep is tracking mid-teens decline), led by VIP as many already alluded to. Corruption crackdown by Chinese government and credit tightening seem like the main culprit from what I've read. There's also a worker strike apparently and concerns about wage inflation.

    That said there are other considerations (source: http://industry.macautourism.gov.mo/en/page/content.php?page_id=12):

    1. Visitors +8% YTD and +7% in Jul

    2. Visitor expenditure (non-gaming) +8% in H1

    3. Visitor per-capita spending (non-gaming) +8.5% in Q2

    4. Food & beverage spending per capita as % of total is steady

    5. Hotel occupancies and rates are around all time highs

    So people are still visiting and they are spending more on food & beverage.

    That said, I agree with what someone mentioned above that "The ASP of 1000 in many of its restaurants, that's more than 2.5x the average F&B spend per visitor in Macau". So my guess is slowdown in spending by high spenders will have impact to FB.

    Few questions/comments:

    1. Does FB's high-end restaurants correlate with VIP?

    2. New growth initiatives like Huafa, catering and souvenir aren't really affected by VIP or overall GGR. Not to mention Hengqin.

    3. Short term, it looks like H2 can be quite bad for casinos and may trickle down to FB.

    4. Are issues I mentioned transitory or are we looking at prolonged recession of sorts (for gaming)? Or will infrastructure buildout and room additions offset these issues?

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  27. Thanks for the questions

    FB's high end restaurants are the Edo-branded japanese restaurants. The average ticket = 800-1000

    Here are the trends in Macau VIP revenue and FB's Japanese sales
    https://www.dropbox.com/s/e5ujblwa8415z0z/Japanese%20v%20VIP.png?dl=0

    Here are the locations of the japanese restaurants
    https://www.dropbox.com/s/stvxuq8345ikcsq/Japanese%20locations.png?dl=0

    Overall, the medium and long term fate of Macau is determined by the visitation policy set by Beijing -- a sort of internal visa system. In part due to that the penetration rate is sub 2% compared to the rates prevailing in Vegas and/or Australia.

    As infrastructure improves, the visa system becomes more liberal and disposal incomes rise, 19m visitors a year may grow -- via fits and starts -- to become 228m visitors a year.

    So, if H2 turns out to be less than great for the casinos because of VIP or, more likely, smoking(I can't imagine that it will be bad, just not great) the market might sell them off big time. In that scenario, the punch card play is one of the concessionaires,like MPEL, rather than some rinky dink F&B business like FB.

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  28. Thanks for info. The locations of Japanese restaurants are helpful.

    I would be concerned about the stock short term though. Basically market is ALREADY selling off FB in sympathy with casino stocks (rightly or wrongly). And given 4 straight monthly GGR decline and no recovery until mid-2015 (if analysts are to be believed), things may get worse from here.

    Stock probably trades sideways or drift lower until either GGR bottoms or release of YE results demonstrate things are fine. Or price just bottoms.

    I might be missing forest for the trees though.

    Also, large shareholder Value Partners recently reduced their investment. The firm is run by Cheah Cheng Hye, apparently the Asian Warren Buffett. I think they will continue to hold a large position given they participated the equity offering earlier this year.

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  29. I have many faults but fear of price action isn't one of them :)

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  30. It seems best plan is just to wait out 2015 and 16 and see what effect new operation roll out and infrastructure roll out in Macau will do to FB?

    Would you buy more at hkd 2 ?

    Also looking at vegas, recession did not hit them that hard. With Vegas you also had increased competition at the same time and saw a 13% drop in revenue in the last financial armageddon. No dramatic 50% drops or anything like that.

    So it seems FB seems relatively shielded from some kind of China crisis.

    Would have been nice if I could have taken advantage of this price action though :( .

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  31. I'd double or triple my position at $2, assuming the prices of other securities stay as they are now.

    Risks to FB = (1) Macau loses its gambling monopoly; (2) War or similar with Japan;(3) major cock up in relations with casinos; (4) banditry by the CEO;

    Everything else is just neurosis,in my view.

    Even under the first three circumstances the market cap would be covered by Hengqin and other non-Macau operations.

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  32. The future's bright!

    Here's something to ponder besides the obvious. What has been driving the mass revenue growth?

    1. The visitor/table/day has been fairly stable at 14-15 since 2009. So 'volume' has not been a driver of SSSG.

    2. Mass revenue/table = House edge * Avg bet * Hands/hour * Length of stay.

    - The house edge is standard.

    - Length of stay cannot be a material driver in the face of visa curbs and anti corruption crackdown.

    - Hands/hour has become mostly optimized already after Baccarat moved to no commission Baccarat (5%*50%) from erstwhile 50%*5% regime.

    - Minimum bet size has tripled in the last few years to a point where it is nearly 20x that of Vegas and 5-8x that of Singapore. Nearly 90% of tables have minimum bet size at north of HK$1000 from less than 50% just a year back. There's little if any room left in minimum bet size driving up the mass SSSG. If anything, with the nearly 70% expected increase in tables over the next 4-5 years, the risk is that the minimum bet size would probably fall driving down table yields.

    That leaves income growth as the convoluted, indirect driver of mass revenue growth until the excesses of the past few years are corrected.

    It will be quite difficult for mass revenue to grow north of 10% sustainably without increased store growth (=more tables). And that carries the risk of negative SSSG for the system.

    For a sub-GDP pace revenue growth sector (VIP will fall so blended is mid-high single digit growth at best)
    with costs rising faster than topline (wages, promotions), there is no sense in giving the current high multiples. The sector ought to derate to 7x forward EV/EBITDA.

    As always, The future's bright!!!

    2sssss

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  33. For some reason when I read your comment, I read it in Alex jones' voice.

    Also what does Super Sneaky Spy Guy has to do with all this?

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  34. The YE results should be interesting. We'll have much better understanding of what drives FB's business.

    What happened to part 3?

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  35. Learning about blogging as I go. Some ideas are so simple that one shouldn't write them up, just place them in the tracking portfolio and be done with it.

    Part 3 would have been about Hengqin.

    https://www.dropbox.com/s/d0d01ism7xni4ey/Hengqin%20business.png?dl=0

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  36. Hi Red,

    Thanks for the idea.

    I think that's the wrong lesson, though, because you end up losing out on the feedback! That hurts *you*

    The lesson I suggest you take is one that causes you to develop a thick skin so that disrespectful people who resort to ad hominem attacks don't affect your mood. If that's not possible, then comment moderation should also do the trick.

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  37. Thanks Saj, that's wise advice. I don't mind ad hominems, actually, and I suspect I started it anyway.

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  38. This might not mean anything but apparently there is 72 percent correlation between Macau gaming revenue and prices of fine French wine.

    Recent wine auction at Hong Kong => http://www.cnbc.com/id/102029218

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  39. 2ssss it is. The future is bright!

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  40. LVS reported yesterday. Seems like retail, food and beverage are up for the most part. Precursor to solid results at FB?

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  41. I'm a bit concerned about this recent related party transaction:

    http://corpsv.etnet.com.hk/webservice/jsp/ETNET/CorpAn/eng/detail.jsp?VERSION=ENG&DOCCD=81379

    By my calculations, the company is renting a space from Mr. Chan at about 5x the monthly rent per sq ft as the prime real estate of the Yellow House (~HK$502/sqft/month vs ~HK$110/sqft/month). The total amount (HK$4.8M per year) doesn't destroy the thesis but this is still disconcerting. I think this is multiples higher than typical prime Manhattan retail rent if I'm converting correctly. Thoughts? Are there other such transactions in the past?

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  42. Thanks for the question. You're right to pay attention to that. That location is right around the corner from Yellow House though with heavier foot traffic. You can look at it via Google street view.

    If this is self-enrichment (and I am myself not persuaded that it is) it is a less harmful varietal than the north American habit of share-based compensation.

    Cash outflows via minority interest not unusual in HK market nor in Macau businesses listed in HK. You could see that as a net negative for obvious reasons.

    I see it as a net positive, as it happens, but reasonable people can disagree on this.

    In any case, I'm not convinced that that's what is happening in this particular instance. Apart from anything else, it seems a bit elaborate to rent another neighboring space from an unrelated party for the ~ same rent in order to justify this kind of minor tunneling.

    The pre-existing MI cash outflows should be enough to feed and dress him until a proper dividend payout ratio can be afforded and established.

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  43. After some additional thinking, i have had a change of heart. FB is a buy now.

    Macau party is not over. The price party is almost over but volume party has some runway still left (only guangdong has been penetrated almost sufficiently so far, the other provinces have barely scratched the surface). So from here on SSSG will be driven by volume rather than pricing. Pricing itself will track a rough function of income growth. As long as hotel room growth outstrips the table growth (likely the case), the visitors/table/day will grow (supply of rooms will create supply of visitors and with table growth trailing visitor growth, visitors/table/day shall rise from around 14-15 levels now. Plus mix will gravitate towards overnight, so length of stay will also rise). All in, mass market shall grow SSSG mid teens and casinos which are expected to see capacity addition, will see mass revenues outpace SSSG.

    One additional point, the mix is getting better. VIP is reducing in the mix, mass is rising. The higher growth, higher margin, less volatile stream improves the quality of earnings.

    BUY Macau casinos! There...the bear just turned into a bull.

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  44. https://www.youtube.com/watch?v=7kFcDKBpdII

    It seems the japan situation looks really ugly right now. Hyperinflation would seem likely. They are basicly in the zone of insolvency. This could get ugly for Future bright as tensions rise?

    The finance minister had a anxiety attack and had to go to the hospital after balancing the budget lol.

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  45. http://www.hkexnews.hk/listedco/listconews/SEHK/2014/1110/LTN20141110407.pdf

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  46. I capitulated on FB. While I still believe in the long-term thesis, the heckler has been right.

    I think EBIT for next 12 months will be lower as the net effect of new restaurants will be offset by investment in Souvenir business. (The new restaurants will probably take a year to ramp and likely won't be as profitable outside casinos). All the while existing restaurants are under pressure from VIP. Q4 GGR is going to be worse than Q3. I think I underestimated the cost of growth and possibility that past profitability has been inflated (yet to be determined).

    There is just zero catalyst (Hengqin is too far into the future) and many near-term pitfalls (Souvenir could flop). To be long here, one must believe in a quick ramp, GGR recovery or change in investor sentiment, none of which I have any insight on. There's possibility FB trades down to 10x trough earnings, which may take it to ~2.

    Feel free to criticize my short-termism. I hope you do well in this investment.

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  47. Thanks for the comment 2t. I think we might reading the numbers differently.

    I see
    -flat revenue per sq ft YOY at japanese restaurants,
    -zero or near-zero revenue contribution from Huafa,
    -2% fall in overall food and bev margins explained entirely by the New campus Chinese restaurant operating at 8% margins
    - and the promised investment in getting moon cakes off the ground.

    More generally, it looks to me that we have a company here that has give or take $1 in net cash and between $0.60 and $0.70 in run rate earnings if including the now open Huafa footprint.

    Mgmt seems to have communicated to the analysts at Standard Chartered (and maybe others) that the trailing 9m margins were as follows:
    Japanese 41%
    Chinese 30%
    Western 24%
    Food court 30%
    School cafeteria 8%

    and that VIP sales, typically 15% to 17% of the total, were instead 13%.

    The way I see it, one doesn't need moon cakes, the pipeline of franchised restaurants, the Cotai food court, Hengqin, new casinos, nor any industrial catering wins to do well in this name.

    Stick a conservative multiple on what's already baked in give it 1 or 2 or 4 years and it's hard not to see it go to $8+.

    If some of those other items work out, it goes to double digits.

    I have very little (probably zero) emotional attachment to any names that I own. When I start to doubt, I cut and run and that's what I'd recommend to anyone. Life's too short to grimly hang on to securities that one has doubts about.

    Thanks for the back and forth on this name and for the link re: Huafa that you shared a while ago.

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  48. Thanks red. You definitely know more about FB than me so take a grain of salt with my less informed views. I am starting to doubt (just a little) though and unfortunately I can't muster the same conviction as you.

    Differences in our numbers:

    - Japanese revenue were down 5% in Q3 => so $/sq.ft. must be lower as well?
    - Agree with Huafa
    - Not sure about the 8% margin for campus, but Food and Catering EBIT margin was 31% vs 38% last year (Q3). And lower in absolute dollars. That means there is either significant startup cost with Huafa and/or margin contraction at existing restaurants.

    I got hk$304M in PF net cash (908 cash/pledged deposits - 344 debt - 260 Hengqin bid) and 699M shares.

    I'm not sure the 9m margins mean anything because to me it boils down to: does revenue follow GGR. That's why the market is selling off FB (whether that is logical is whole other can of worm). Only Q3 is relevant as it's the first negative GGR quarter in many years. It would've been nice to know SSSG and SS margins but I think the reported numbers are quite close. Both appear to have decreased in Q3.

    Your earnings run-rate is right IF we assume no further contraction at casino shops. I think there is some truth on GGR correlation (or at least enough evidence that I can't reject it) and where GGR goes from here is anyone's guess. I do think if we add all the growth options you listed FB is still undervalued.

    The timing of sale by Value Partners is also quite impeccable.

    Bottom line:
    - Long-term Macau and FB will still grow, but short term there will be a "reset" on casino restaurants
    - I don't know where the reset will end up
    - Growth in non-restaurant businesses will depress earnings short-term
    - There is some risk that investments could fail
    - Potential selling pressure from GARP/momentum type investor base
    - Everything I said could be wrong

    If things pan out I agree there is big upside. I may get back in if I see evidence of that, even if that means buying back at $4.

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  49. Btw, could you explain how you got $1/share in net cash?

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  50. 2t,

    We're starting from the same place re: net cash. I'm just adding Q3 & Q4 cash flow to arrive at an estimate for the net cash figure to be reported in the next filing.

    As for the rest, I think the most useful way to see what's going on is to trace the development of the size and kinds of restaurants through time.
    https://www.dropbox.com/s/nrldwp1juttizpj/0703HK%20%28November%202014%29%20V2.xlsx?dl=0

    The company occasionally changes how it classifies various formats so it's worth tracking that too.

    So, for example, "Chinese" in Q3 includes 10,889 additional sq ft from New Campus, representing 28% of total Chinese sq footage. It wouldn't surprise me if New Campus Chinese Restaurant margins were ~15%. If so it explains the margin decline from 38% to 31%. It seems to me, very little to do with GGR.

    OTOH "Japanese" rev/sq ft is down QOQ by 6% from 1772 to 1678, and is flat YOY (1669/sq ft in 2013 v 1678 sq ft in 2014) versus 19% YOY fall in VIP Baccarat. It's not the first time that there's been QOQ declines (see eg 2012) and it won't be the last.

    As F&B has trended toward lower margin product mix, keeping expenses per sq ft constant means the kind of margin compression we've seen.

    We were promised ~$40m in up front marketing expense in launching mooncakes (not just the v expensive rents but also investments celebrity endorsements and so on) and we seem to have seen that, too.

    So, I don't know. I saw nothing alarming or unexpected in the Q3 update. (Also, I'm sure the HK protests will drive some Golden Week traffic away from HK/Macau so I expect some softness in Q4 #s, too, compared to what could have been).

    Except for over the very shortest time horizons, the trend will be up and that's good enough for me.

    I know though that it's a far more convincing argument when the share price is rising than it is when it is falling :)

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  51. Something to chew on: http://online.barrons.com/articles/value-partners-eric-chow-on-stocks-he-likes-now-1415946759

    Japanese: I think you missed one restaurant opened in July (in Hong Kong) of similar size as one that's closed. So rev/sq.ft. is probably (though we can't be sure) down 0-5%. And closing a restaurant should boost rev/sq ft anyways? Otherwise why close it.

    I did notice that I mixed up some numbers and overall SSSG is not as bad as I originally thought. But I think it's still a slight decline (just eyeballing here) vs. growth in H1. (Basically sq ft ex-food counters are up. Restaurant revenue grew 3.8% adjusting for food counters. All of that growth from unit addition imo.)

    We can slice and dice the numbers ad nauseam. That's why there's a market, as the proverbial saying goes. For your sake, I hope it works out. Quite a big position!

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  52. I just went to Macau to attend a wedding last Saturday. The Venetian shopping mall was relatively busy. The Sands Cotai Central and CoD were quiet.

    I happened to walk past the 3 Edo restaurants in these 3 locations around lunch time. There were not much customers inside. This is my casual observation that I think you guys might be interested.

    Chris

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  53. Chris - Thanks for passing along your observations. I appreciate it.

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  54. Hi Red,

    Own Future Bright right alongside you.

    How do you feel about recent plunge downwards? Are you going to add more to your position?

    Anything changed in the fundamentals with regards to the company? Or are you rubbing your hands together as it just became an even better deal?

    Appreciate your insights

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  55. Hi,

    I added more at the open, The problem is that my initial position was large enough that adding more doesn't lower my average cost (it is now $2.90) by all that much.

    Starting from the ground up (per share):
    Unrestricted cash: $0.55
    Yellow House: $0.78
    Hengqin land at cost: $.37
    Subtotal = $1.71/share

    Stub = %0.08

    For the stub we get:
    Stress-case FCF from mass-market restaurants and airport/college catering = $0.195/share

    (Japanese-themed restaurants = $0 for the sake of argument. Rent is % of revenue, not a fixed cost, so operating leverage is not dramatic. Of course, FN could change the format/ASP of these restaurants to generate 25% to 30% gross margins instead of the 40% margins it had been earning from the VIP market. If so, one could add another $0.10 in FCF per year to get to a total stress case FCF of $0.29/share)

    There's obv cash investment in moon cakes and in Huafa that's a temporary cash flow drag but that shouldn't last for more than a year.

    In the meantime, the company could sell, say, a half interest in its Henqing property for $1.05.

    So that's that. We haven't talked about future sources of FCF, both certain and uncertain, but there's no need to at this valuation.

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  56. What do you think about the fast decline of casino revenues? It cannot be just VIP gaming being down as all games of fortune seem to do badly all of a sudden. The sign of an onset of a recession in China?

    Just looking at normal baccarat, it declined almost 30% in the 4th quarter.

    Allthough you would think long term Macau should do fine.

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  57. Hi Red,

    Thanks for the thoughtful write-up. Was doing some research and was wondering if you could provide a link to the trailing 9m margins for "Japanese 41%
    Chinese 30% Western 24% Food court 30%
    School cafeteria 8%"? Thanks :)

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  58. Sure. I've uploaded it here:
    https://www.dropbox.com/s/4s3bbth3lggnt1u/Standard%20Chartered%20Nov%202014%20Update.pdf?dl=0

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  59. Great blog, why do you put a value on the half interest in Henqing property for $1.05 when the July transaction price was 39 cts for the whole in July 2014?

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  60. The sale price in July was a subsidized number. The government wants to encourage (1) balanced development and (2) encourage ties with Macau. Hence the subsidy.

    If you look at Shun Tak's purchase of a similar site
    http://www.thestandard.com.hk/news_detail.asp?we_cat=2&art_id=136095&sid=40040472&con_type=1&d_str=20130801&fc=7
    you'd see a market value of $38k per sq M of site area or $7k per sq M of gross buildable area.

    Shun Tak then sold 30% interest in the site to a group from Singapore for $8300 per sq M.
    http://macaubusinessdaily.com/Business/Shun-Tak-sets-JV-Hengqin-project

    That was in 2013 and real estate values in Hengqin have advanced quite a bit since then.

    Current prices of premium residential development in Hengqin approximate HK $40k per sq M.
    http://www.hengqin.gov.cn/en/index.php/home/content_content/db/22/id/15

    Halve that amount for undeveloped sites. Apply a 50% premium for commercial use, and that gets one to $30K per sq M or $2.15/share.

    Future Bright is in the food business, not the property development business so one would think that the reasonable course of action would be to sell a part interest in the land use right to a developer.

    The other way to come at it is to work backwards from the implied rental income. Like this:
    https://www.dropbox.com/s/r41amorb3ik5u92/Henqing%20land%20value%20by%20implied%20rent.png?dl=0

    Either way, the key is I think to understand that the July transaction was a subsidy, or wealth transfer.

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  61. Red, I thank you for this most detailed and insightful reply.
    The acquisition price indeed looks attractive, this adds somewhat to the Margin Of Safety of the long term, capex greedy,high risk Hengqin project.
    I read FBH was highest ranked out of 83 other bidders by the Macau authorities for this 40y lease auction.
    One gets a general sense that Chak Mo Chan is well connected. As a lawmaker he is representing the culture and sport functional constituency of Macau, and also involved in drafting anti-bribery laws in foreign trade.
    The secured bank loan covenants put a floor on his equity holdings (37%).
    My question is: as the cash will be used for the Hengqin project, there is not much tangible MoS, apart from the Yellow House (HKD 500m).
    It is all about the food and beverage business. But should Chak Mo Chan get out-of favour in the region, this business itself would be at risk. Last time we looked the catering business had low barrier to entry and cut-throat competition.
    Do you think the share price is low enough at HKD 2 to protect against this key man risk?



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  62. Well I'm not sure why using cash to develop the Hengqin land would impair the MOS. Developing it would be a productive use of cash since the developed property would be worth more than the cost of its development.

    Second, FB is not a developer. I think it makes most sense for the company to sell a part interest to a developer who will build the site.

    If the land is worth $2/share it can sell 50% of it for $1/share. Add the value of the Yellow House property and the office in HK and we're at $2/share which is the market value of the company.

    We haven't talked about the food business yet.

    Key man risk:
    Future Bright doesn't need debt. The debt is largely offset by restricted cash. Even if it weren't and Chak Mo Chan was to retire from the business, the debt could be retired via the sale of Yellow House.

    Second, the company's Chairman is Chak Mo Chan's brother. It would not be crazy, I think, to imagine that the transition would be smooth.

    Third, Chak Mo Chan is an indirectly elected legislator -- i.e. appointed rather than elected. If you are directly elected, you express views in public that may or may not get you into trouble one day. If you are not, you don't have to express any such views.

    As for cutthroat competition -- I'm not sure I agree with you either generally or in reference to FB.

    In general terms -- and it's almost always unhelpful to talk in general terms -- F&B businesses are as good as the locations of their stores and the terms of their leases. Brand helps but can't save you.

    FB doesn't have a brand but it seems to me that FB's stores are in the locations that I'd want them to be in if I were running things. And that the leases are structured in the way that I'd want them to be.

    But, of course, everyone sees things their own way and I'm a big fan of people only investing in situations that they themselves feel comfortable with.

    ps Your nom de guerre made me smile

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  63. Q4 unaudited results are out. Food souvenir is a significant drag, $40m HKD loss. Restaurant operating margins down a lot (to 24% from historic 36%) due to new openings. Industrial catering is the minor bright spot though a very small part of the business still.

    http://corpsv.etnet.com.hk/webservice/jsp/ETNET/CorpAn/eng/detail.jsp?VERSION=ENG&DOCCD=82544

    I'm hoping the annual report has some discussion on how VIP is impacting their restaurants, looks like they're dialing back on Japanese which as discussed above is highest margin. I'm buckling in for the long haul and am looking forward to new casino openings over the next year+.

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  64. I think the numbers show casino restaurants at 2012 revenue and EBIT levels.

    The next set of results will show us (a) the potential of landlordism at the Huafa food mall and (b) the nature of the company's plans for Hengqin (sale of partial stake would be good).

    Macau sentiment ought to have turned by then, too, so there may be some multiple expansion in the back half of 2015.

    After that it's a matter of waiting for all the bits and pieces -- and there are a lot of them -- to kick in and mature.

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  65. Red: First thanks for the post. Very detailed analysis! In your comments you mention the increase of visitors to Macau can increase to more than 200m per year. Are you serious? In 2014, visitors to HK: ~60m; to SG: ~15m; to Macau: ~31m; to Vegas: ~41m. The number of 200m seems too large, even in several years' time, don't you think? Sam

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  66. Red,

    I can´t understand why is FB so cheap. Just the henquin project is worth the same as the company. The future growth seems also good

    Are you used to see companies as cheap and good as this?

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  67. Hi Red,

    Didn´t find any news for the strong volume traded today on FBH. Any explanation?

    Thanks..

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    Replies
    1. I didn't see any particular news as well but this level of volatility / volume is not surprising at all, given that this is a micro-cap sub $100m. It is probably driven up by a large buyer speculating on a positive profit result in the coming quarter as FBH is a severe laggard in the Macau-gaming /related stocks. if I recall, there's similar price/ volume movement prior to the last quarterly result as well...

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  68. I guess this is the answer: July GGR up 29.2%

    http://macaubusiness.com/up-up-and-away/


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