Tuesday, August 25, 2015

Future Bright - H1 2015 (1 of 2)

The company has upgraded the detail with which it reports results so that we can now substitute management provided information for some of the informed guesstimates that I attempted in a prior post.

For the moment, I am particularly interested in the question: How much did the company earn before its investments in the Huafa mall and in the food souvenir business?

This is what the answer appears to be:



and


therefore



One or two seemingly reasonable assumptions (50% gross margin for the food court; pro rata share of mall operating expenses by floor area) and we can surmise further that the Huafa restaurants are operating at or above breakeven:



The food court will be closed at the end of August.

Disclosure: I own shares in this company

40 comments:

  1. When calculating Huafa Gross Margin in your workbook above, shouldn't you subtract 9.8 (Food Souvenir GM) instead of 5.2 (Food Souvenir CoS)? This would give Huafa GM of 22.4m and Huafa gross op loss of -10.7.

    Mario

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  2. Reds

    First of all, i would like to show my appreciation for sharing your opinion.

    For me the most troubling issue from 1H result was the revenue figure from resteraunt operations. What is your take on deteriorating in sale from japanese and chinese resteraunt?

    RV

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  3. M -- Quite right. Thanks for spotting that.
    RV - I'll be discussing the restaurants in my next post

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  4. hi red- would be curious to hear your take on $RJET given today's developments? any hope left for the company?

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  5. Unfortunately I think it gets forced into bankruptcy so that a judge gets to decide the terms of a pilot agreement. It mught become interesting again in bankruptcy or soon after emergence since I think there are a few years of free cash flows left before the regional airline business model as a whole becomes either rethought or completely broken. We'll see what happens.

    You might enjoy this piece which I read a a little while ago
    http://philip.greenspun.com/flying/unions-and-airlines

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  6. With the recent disappointment in keck seng, what would you say about Asia standard? Discount to book value is absolutely massive now.

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  7. red. Any chance you could post a few lines about your thought process behind XiabuXiabu?

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  8. Hi Red,

    Do you have any thoughts on Information Services Group at this price level? Or is there just too much competition for capital in your portfolio at this point? Also, any particular reason you have chosen XiabuXiabu over Tsui Wah at these prices?

    AndreS- This CS report outlines the opportunity in XiabuXiabu if you haven't seen it- https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=1043433381&serialid=qd0HWyriH2AikA5r5KMY7zGH03dNfxFJetPyX0RN96I%3D

    Anyways, thanks for keeping one of the best investing blogs available up and running.

    ReplyDelete
  9. Hi --ISG is good value at the moment, clearly. I'm just taking a wait and see attitude wrt how the market reacts to its Australia & FX exposure.

    Re: Xiabu/Tsui Wah: I'm more comfortable with Xiabu at these prices b/c we know that Xiabu has proven itself in the PRC market, notwithstanding regional differences. Similar upside, probably, but Xiabu seems to me more sure.

    -----

    Anon -- My investment case for Keck Seng didn't turn on what happens prior to 2016/7. The case for Asia Standard relies entirely on the appearance of a greater fool to take the shares off one's hands at its "usual discount to book". If one valued it properly, however, using the net present value of the cash flows that one would receive from the company, the shares are clearly overpriced still. (If someone offered you that deal in a private market, you'd both laugh and feel insulted I'm sure). So maybe/probably a good trade -- the public markets being what they are and greater fools appearing with some regularity -- but there's no tangible safety net, imo.

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  10. Hello RED

    It would be great, a post about FLYBE, it seems very interesting and with a lot of upside. Greenwood investors think it can be valued as much as 600p in 2-3years

    Thank you

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    Replies
    1. I think 600p is too high .. maybe 250p to 400p is a reasonable target in 2 or 3 years. I will write it up as soon as possible

      Delete
  11. Thanks for the response. Ever looked at Calpine Corp? Corsair/Tiger Ratan pick, some good VIC stuff on it. Seems like a real share cannibal.

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    Replies
    1. I haven't. Thanks for mentioning it.

      Delete
  12. Thanks for the response. My problem with Keck is really, what makes it so different from all the other Hong Kong traded real estate companies that are trading at a discount? And with the disappointing results it makes me wonder if the market already knows about their Macau apartments, and this is just the usual discount since investors will likely not see much dividends compared to profits anyway.

    It seems if you still apply a sizable but smaller discount (because of their more solid overseas assets) upside isn't really more then 10$.

    It seems to me a lot of these Hong Kong real estate families like to use these stocks as personal investment vehicles, and the market is giving them a discount for that. Or is Keck different and will they pay out most of their earnings at some point?

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    Replies
    1. Well,it pays out 30% to 35% earnings and compunds retained earnings and therefore dividends at 25%; and its assets are spread out all over the place. So, even setting aside the future sale of the Cotai condos, one would have to say that a ~3% dividend yield compounded at a long term rate of 25% is a good deal for anyone but the most exceptional investor, surely?

      I doubt that Keck Seng is a secret, frankly. It wouldn't take 2 minutes to find Keck Seng via screening software. The trick with this stock is to be more patient than the market. Step back, ignore market-speak of discounts-to-book and earnings surprises, and you can see that, 9 times out of 10, this is the kind of stock that makes you thank your stars that you saw it way back when.

      IMHO etc

      Delete
    2. Alright thanks. Allow me to make the case for Asia standard International though.

      Here is what you get for $1.9 billion :

      They directly own 364k square feet of investment properties in Hong Kong (of which they added 80k sqft on oct 14). This generates about 120m in FCF directly to ASI and will likely grow. Then their 73% stake in Asia standard hotels seems to be at least worth 1 billion HKD? 20% capacity is being added in 2016 and 2017, with some operating leverage. Some 250m$ in recurring cash flows doesn't seem crazy. Then their net cash position if you think their financial investments are worth book value, is about 800m$.

      But what makes it interesting (and one of the reasons you saw no FCF in the past few years) is their 4m square feet pipeline of development over the next 5 years, of which 500m sqft in Shanghai is already finished, 70k sqft in Hong kong which is in progress, 1.1m sqft in Beijing, which is expected to be finished in 2018, 500k sqft in Hong Kong expected in 2018, And then 1.7m sqft in Macau expected to be finished in 2019. They seem to have a very good reputation and track record with real estate development. Won several prestigious prices, and are in bed with Grosvenor (dont seem like the types to do business with clowns). So this could throw off a ton of cash in future, which does not seem to be reflected in current market value?

      But if you focus on the Shanghai properties, those are finished and put on sale this year. They seem to be located in a good location, and ASI seems to have a reputation for high quality real estate if you do some digging. These properties can easily net them $4-7 billion at $8-14k per square foot (rough estimate of Shanghai high end real estate prices). That would be 2-3x the current market cap.

      Plus Dalton has a sizable stake, and they do not seem to be Graham type investors.

      It seems if you have patience, at some point ASI will throw off significant amounts of cash? And the reason the past 5 years look ugly, is probably why it is so cheap? If you can shoot it down, greatly appreciated!

      Delete
    3. Here is an attempt to show their FCF since 2008.
      http://i.imgur.com/dkxs4X2.jpg

      In the bottom I took FCF - interest income from investments. It is kind of difficult to set them all apart with the investment properties they will sell.. But it seems that they would generate a steady 200m$ in FCF without financial investments + changes in properties in current assets distorting their cash flows? This does not take any increases into account. This is also direct FCF to ASI.

      They have spent a lot on those development properties which will be sold in the next 7 years or so. Plus their 365k square foot office properties seem to be under earning. They can easily earn several 100 million HK$ more in the next few years. With rental reversion, their commercial properties should easily earn 2-300m annually in rents on 365k sqft.

      Plus they paid out about 1/3 of their market cap in the past 10 years. But income and FCF will likely increase a lot compared to several years ago, given the size of their investment portfolio.

      That is all I got, thanks for reading :)

      Delete
  13. @anonymous - I've been looking at Asia Standard as well and I have similar feelings. Maybe we're the fools Red is referring to :) He did say "using the net present value of the cash flows that one would receive from the company" -- I suppose he's referring to dividend and not FCF. Asia Standard has been paying a dividend since 2008, but yes the Keck Seng dividend is clearly superior. I've been looking at Lai Sun Garments as well. Third Avenue owns 8% to 9% of it, and the cap rate used to value the properties is better than what I get when looking at Asia Standard. There seems to have been a small token dividend last year, but otherwise, nothing. I guess Red prefers a dividend when investing in China. I understand the reasoning behind that... but these look so cheap!

    investor-man

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    Replies
    1. @Red follow up - do you use a valuation based upon dividends received to give yourself a conservative lower bound MOS?

      Delete
    2. I suppose I care about dividends so that I don't have to care about what the market thinks about my stock. If I pick the right stock it will take care of me and picking the right stock is something that I can (at least pretend to) influence.

      Look at the chaps who bought Asia Standard at 0.3x book, for example. Who'll take care of them? They're stuck and they know it.

      I think that in most places, most of the time, the thing to do is to guess at how much cash one'll get back from the company in return for one's investment in it and pay a price appropriate to that expectation -- plus wiggle room for errors.

      Obviously in an Anglo-American bull run the only thing that matters is what someother fellow will pay for your shares so we get involved in trying to figure out how the elaborateconfidence game of EBITDA multiples, discounts to NCAV, relative P/E ratios, PEG, etc etc is played.

      But if one's a tourist in an emerging market that the locals think is in -- or is about to be in - trouble, it probably doesn't hurt to try to strike a deal that doesn't 100% rely on fellow investors juggling abstractions :)

      Delete
  14. Just to make sure that we're not talking past each other I've pulled this together:
    https://www.dropbox.com/s/cpzgxtwwlr0f470/Asia%20Standard.png?dl=0

    In and out at the historic discounts to book (central tendency);
    book value growth at historic rates;
    dividend payout ratios at historical rates

    The FCF that your talking about is reflected in NAV growth. Okay. So you get a 15% annual return on your money from Asia Standard. That's the cost of equity for that region so the implication is that you're not adding value.

    What does adding value look like?
    1. NAV is understated --> higher ending book value
    or
    2. Dividend policy is understated --> high exit multiple (i.e. lower discount to book at exit) and more valuable dividend stream

    So if you have good foundation for making those arguments -- the real estate appraisers don' know what they're taling about; management has signaled a change in payout policy -- then Asia Standard is worth more and "you're one up on the market".

    Contrast with Keck Seng which is both higher expected return and lower risk -- both because you get you cash back sooner and because of the geographic diversity of the properties. .

    That's really all I'm saying. That's why Keck (and many other RE entities command a lower discount to book/NAV than something like Asia Standard.

    Having said all that -- and keeping in mind that the central-tendency BV multiple is 0.15x -- we can see that every so often someone runs a screen, sees that ASI is trading at a low multiple and bids it up to 0.3x book. I have no doubt that that could happen again.

    On the other hand, it may not happen again. In which case, you've taken on cap rate risk (via the LT direction of interest rates), FX risk, execution risk, and governance risk for a 15% potential return.

    And if that's so, would it not be easier to try one's luck with something like CTO rather than going all the way to Asia for that r/r tradeoff?

    That's my 2c and imho etc.

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  15. That imgur link I posted needs a few corrections and comments though. Net FCF in 2013 is 20 instead of 210, and inventory movements includes non current properties under development for sale. And share from asset sales in 2010 and 2011 was higher with much lower % coming from rental and hotel.

    I guess I disagree with two things in your dropbox link. The aggressive growth in book value for both companies and the amount that will be paid out to investors with Asia standard. It seems a good amount of growth of both companies came from the incredibly growth in China, and the 2009 market crash which was sort of a rare event (in the sense that you could find some really cheap assets in that period). When growth normalized, and the world goes through a deleveraging in the next decade or so, I don't think growth will be that good going forward for both companies. Unless we see another major crisis where assets values go down that much again.

    The hotel Keck bought in the US at a 15% cap rate, and their macau real estate bet, those seem to be largely one time events going forward. Same thing with ASI's real estate and enourmous growth in hotel income. The hotel bought at such a low cap rate recently reflects this.

    second thing I disagree with is cash paid out to ASI shareholders.
    -In 2006 they had 1.1m sqft of properties under development.
    -50m HK$ of rental income (excluding income from Associated companies here, since some of that must be non cash)
    -Income from hotels was much lower with only 60-70m$ with 3 hotels vs 4 now. (hard to estimate since hotel financials only go back to 2007.)

    So now you have:
    4m sqft under development, of which 500k is already finished (with likely several times value of market cap), and most of the land is already paid for.
    -FCF in hotel segment was 193m$, 150 of which goes to ASI (with 20% capacity growth and operating leverage (since they are additions to current hotels) in '16 and '17).
    -Rental income of about 115m HK$ But using average rental rate of 90$ per sqft per month I get closer to 400m$. So this is probably between 200-300m$ to be safe. Using a 50$ rental rate on 353 sqft directly owned, I get 200m$ already.
    -And a conservative balance sheet.
    -So far they made almost 3 billion on financial investments with a cost basis of 4.7 billion. This is probably mostly one time as well, as this only started after the crash in 2009.

    It seems that management is conservative. Since 2006 they paid out 38c in dividends. In 2006 it was trading at about 2.5$. So that was about a 15% pay out rate + massive growth in book value and recurring earnings.

    Given that net debt hasnt really increased, why on earth does it deserve a 90% discount? Especially since payout will likely be a lot higher going forward. Recurring income alone will be 4-5x higher 2-3 years from now vs what it was in 2006. To say nothing about income from development.

    And management seems at least competent. If there are good opportunnities they will take them, otherwhise they will sit on it and payout will increase.

    Third point to make, if I take several China real estate developers like Yanlord, Evergrande and Kaisa, they trade at much lower discounts (40-60%), yet have more leverage and exposure to tier 2+ cities in China? And they don't have a large % of their assets in Hong Kong providing recurring income which is arguably much safer then mainland China. So with that logic, shouldn't ASI trade only at a 20-40% discount? Especially with the increase in cash flows in the near future.

    I guess last thing I will say about it if we don't agree , IMHO etc as well.

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  16. I'm wondering if anyone here have looked at China Shengmu. This stock seem to have a moat as an organic dairy producer with a certified european standard. Just can not see anyone replicate their environment as mentioned in article below.

    http://pg.jrj.com.cn/acc/Res/HK_RES/STOCK/2014/8/20/dcac7e0f-84bb-49d2-a789-e3f897ba7299.pdf


    P.S. Just ignore my post if you thing it is inappropriate

    RV

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  17. RV, sorry for my delayed response.

    I think China Mengniu is expensive. In the end, anyone can milk cows in Mongolia. Its moat -- if it has one -- is in distribution. Will it have a comparative advantage in cold chain logistics in 25 years time as the P/E multiple suggests? iI's not obvious to me that it will and -- as you can see -- I have bought a few shares in another company (Haier Electronics) that I think more likely to succeed in doing that and at half the multiple.

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  18. First of all thank you for your replied red.

    I must say china mengnui situation is exactly like what you've written.

    Howevery, you might misunderstood. The stock i was mentioned was china shengmu a much smaller organic milk producer. Shengmu moat is their rent of suitable location for orgaic farming which is short in supply. In addition it has growth significantly over 12 months period but profit is being depressed by falling dairy price.


    Cheer

    Rv

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    1. Gee whizz. My apologies RV ..

      I looked at Shengmu's pre-IPO prospectus and, according to my notes, had the following thoughts:

      1. This reminds me of Biostime
      2. 32 yr old CFO
      3. Ex-Mengniu staff
      4. Short operating history
      5. Branded product has potential but the real appeal is (a) the category of organic milk rather than the particular brand; and (b) it is undercapitalized in relation to the market opportunity so either it wins big or gets squashed by a bigger player;
      6. beijing hypermart distribution is a positive.

      it goes on like that ... I didn't get a strong enough feeling about its prospects to follow up. I'd look at it again at under 4x trailing earnings but it's too expensive for me now especially given the other opportunities that exist in the market.

      I hope that helps

      Delete
  19. Have you ever looked at Videocon, an Indian satellite TV company that was recently written up on VIC? It's the typical story for that type of business - clear pathway for growth plus operating leverage lead to sharply increasing returns. I have no insight into the Indian TV market, but based on the writeups I have seen, Videocon appears to be well positioned to be a winner in that market.

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    Replies
    1. I'll never participate in anything promoted by the Dhoots...

      Delete
  20. http://www.ejinsight.com/20150910-why-macau-is-pushing-chinese-medicine/

    The success of this business park would be good news for FBH, as this is where their food court should be located (based on their 2013 FS).

    Looking forward to part 2 of your FBH post!

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  21. Red,

    May i ask what do you see in Nirvana Asia, possibility to penetrate new market in China and indonesia?
    What is the company MOAT in their case.


    Appreciate

    Rv

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    Replies
    1. A number of things going on with this company:
      a) largest sales force in Malaysia --> 55% market share in pre-need death care services in Malaysia (pre-need market is still just 5% of total market);
      b) margin expansion since since recently acquired facilities are not in full swing
      c) regional expansion made easier by strong US dollar -- not just in PRC but also in VN, Indonesia etc (esp among ethnic Chinese populations)
      d) at severe & unjustifiable discount to 1448.HK

      etc

      Lots to like, not much to dislike.

      I may rotate out of it at some point to fertilize my Future Bright position but I think it's worth $4.50 to $5 today

      Delete
    2. The problem i have i valuation of this stock is largely due to share of future demand which has been absorbed as part of pre-need revenue. PE wise the stock traiding at comparable price to taiwan listed Lung Yen Life Service Corp,

      Delete
    3. Try using EV/EBITDA instead.

      I'm not sure I understand this exactly: " largely due to share of future demand which has been absorbed as part of pre-need revenue" but I'll give answering it a try if you expand on what you mean

      Delete
    4. If i understand correctly

      Say you can estimate number of death and base on market share come up with estimated number of funeral services in the next 5 yrs. Say 10000 cases
      Now some of this will already be paid as pre-need which mean this number will be deducted from the said 10000 caes above. This is the number i do not know.
      Another part is niche which is pay to reserve spots for relatives to leave the urns of the deceased which will also absorbed that 10000 demand further.

      From annual result 2014

      " According to Frost and Sullivan, the penetration rate of pre-need death care services and products in 2013
      was estimated to be 5.8%, 1.9% and 0.8% in Malaysia, Singapore, and Indonesia, respectively.
      Upon just a 1% increase in penetration rate, it will generate USD373.7 million, USD113.0 million
      and USD368.4 million of pre-need revenue in Malaysia, Singapore, and Indonesia respectively. "

      Delete
    5. I think I see what you mean. 100,000 deaths per year, 5,800 pre-need contract sales, 90% of whcih are are converted into recognized revenues and so on

      I found that I spent more time trying to understand why this company is publicly listed: it doesn't need public funding for growth and has unsold inventory to last 25 years at the current sales run rate.

      It's also worth mulling over the risks inherent in the multi-level marketing sales model, in my opinion

      Delete
    6. Either the owner is very ambitious or anticipating a rapid hike in service damand.

      Btw, what do you thing about FB standing with the new visa relaxation?

      Delete
    7. FB doesn't really need the help from IVS relaxation. The business ex-Huafa and souvenirs is generating > $100 million in FCF to common equity at the H1 2015 annualized rate. It might help souvenir sales somewhat if H2 2015 souvenir sales come in at under $100 million. FB is worth spending some time on (if you haven't already).

      IVS is a lmore useful to Paradise Entertainment. Kam Pek is fine, still generating EBITDA > 40% but Waldo is new and could use the help from incremental traffic tailwind in making their strategy work -- less need to invest in complimentary rooms and so forth. Small increases in foot traffic cause big improvements in EBITDA at a fixed cost operation like Waldo.

      Delete
    8. Yes, i have looked in to FB a little. At glance it seem like SSS especailly for their Edo brand is declining quite significantly.
      New business as you pointed out in this article has yet to make money

      I will looking in to more info and come back to discuss.more.

      Thx

      Delete
  22. Do you have any thoughts on the big increase in admin expenses at FB? Sure adds a significant fixed cost element to the story, at least before they gain scale. Thanks for pointing out this one-looks like an incredible opportunity.

    ReplyDelete