Wednesday, January 13, 2016

2015


Bent out of shape

2015 turned out thusly [the weighted average portfolio allocations for the year are in blue]:


This was a year in which the results were driven by Future Bright Holdings. Its market cap halved -- and halved again. A market price at, in my view, a deep discount to the value of the business (see below) brings about its own risk of loss via privatization by the owner operator. Chan Chak Mo diluted his ownership stake at $4.30/share halfway through 2014; the shareholder base must, by now, have completely turned over so that there is no longer a constituency to howl in protest; and the potential for a "take under" is therefore not inconsequential. So I kept buying and allocating an ever increasing share of my portfolio to it. 

Given that both Macau and O&G sentiment turned south at the same time I was left with an ever diminishing slither of my portfolio to allocate to regular industrials. And that, in turn, meant greater turnover (the average trade in the third column lasted two or three months), underweighted positions in straightforward value propositions (Thorntons and Flybe in particular), and two execrable errors (Enterprise Group, Republic Airways) as I sought near term payoffs to recycle into Future Bright.


Keck Seng Investments Ltd

This is an opportune moment to mention my position in Keck Seng Investments, an opportunity written up very well by gvinvesting at the Value Investors Club. This is what I see:


One way of looking at Keck Seng from a public market valuation perspective is to reorganize the parts as follows and to apply a discount -- 20% to 30% -- customary on the property net asset value for assets of this quality:



Alternatively one might count the present value of dividends. Keck Seng pays out ~35% to 40% of earnings and has grown dividends at 20% to 25% per year over the long term. So we might say that the markets should be willing to accept a 2% yield -- decomposed into 7% income less 5% forward dividend growth rate. If so:

If Vietnam's anticipated legalization of gambling for its own citizens occurs within a reasonable time frame or, if Keck Seng decides that it doesn't want to repatriate its US earnings -- tax, anticipation of currency trends -- and opts to spin off its US subsidiary into a REIT, then there may be upside beyond what I have indicated above.  If China's VIP gaming troubles spill over into Vietnam -- and on balance I think they will -- there's likely some share price volatility ahead.


Future Bright Holdings

Here is my sum of the parts valuation of Future Bright. In contrast to Keck Seng SOTP analysis is not going to decide Future Bright's fate but is nevertheless useful as a guide to decoding just what has and hasn't happened to the business over the past year and a half.



These estimates did not and do not assume, incorporate or hint at any recovery in VIP traffic above the levels seen in the first half of 2015 -- and they attempt also to incorporate the effects of market share losses as Macau's center of gravity continues to shift from the peninsula to Cotai.

So what has happened over the past 18 months? 

The company has: 

1. Launched a food souvenirs business

It has purchased the right to use the 80 year old Yeng Kee Bakery brand* in Macau, issued share options to mainland celebrity brand ambassadors, spent up to $28 million in launch advertising, and a further $8 million in training retail staff.  It has rented thirteen shops -- in casinos, at the airport, in the high street, and at its own Yellow House property at the ground zero of fanny pack tourism in Macau. (The Ruins of St Paul is to Macau what the Tour Eiffel is to Paris. Its outline is overwhelmingly stenciled on Macau sold mooncakes. Yellow House is located in the shadow of the Ruins).

The company thinks that it can, over time, command a 4% share of the market for food souvenirs in Macau and the financial justification for this investment is therefore as follows:




Two existing Macanese franchises -- Koi Kei Bakery and Choi Heong Yuen Bakery -- are omnipresent and dominant in the food souvenirs space, controlling 85% of the market between them. Future Bright is competing for a share of the remainder and, if selling mooncakes, almond biscuits and boxes of chocolate is, in the end, a matter of visitor traffic, distribution channels, and branding -- in that order -- the company is in a privileged position in competing for that remainder.

By the end of this year the company will have spent ~$90 million for an implied expected return of $900 million in present value terms, give or take. It looks to me, at this as yet early stage, to be on its way. 





Given the seasonally adjusted sales per sq ft trajectory to date and management's stated intention to optimize the mix of storefronts over the next few months I expect this business to make further progress toward FCF breakeven (after admininstrive expense allocation) in 2016.

* The second generation owner managers of the Yeng Kee brand have used the proceeds of the sale of the Macau rights to fund an apparently successful foray into the mainland.

2. Added 32 catering outlets





Of these new openings the 19 food court counters have not worked out at all well and are responsible for most of the gross operating losses. These food court counters have now been closed.

3. Acquired various properties, including land in Hengqin

Future Bright was awarded the right to purchase a parcel of land in Hengqin. It issued 65.4 million shares in a private placement at $4.30 to finance this purchase. 

If residential property sales are currently transacted in the neighborhood of RMB 40K per Sq M and if things go on to appreciate from there, then




This is the way that the sell side analysts had chosen to assess the value of the Hengqin property. 

If, on the other hand, current retail rents are in the RMB 400/SqM range, then




The legacy business


The legacy business as existed in the first half of 2014 -- presumed by the market to be in disastrous shape (or perhaps I myself am presuming what the market presumes)  -- has performed as follows:




Much of the weakness in the legacy food business is, I suspect, attributable to the absolutely and relatively disastrous performance of SJM's Casino Lisboa in this downturn as well as to the presumably poor performace of the Hotel Lan Kwai Fong. The restaurant in the latter property has now been closed. 

A composite picture


The last 18 months for the company as a whole therefore looks something like this:


and, after adjusting for non-recurring items :




Looking forward


I think the next few years will look something like this, give or take a $20 to $30 milllion in either direction depending on all the usual variables -- macroeconomic, Macau-specific, timing of restaurant openings, relative market shares of Cotai and peninsular properties, etc:



I bought these shares at ~$3.30 and my abolute cost basis is now $1.48.

I have a position in another Macau-centered company -- Paradise Entertainment -- that I think is also misunderstood but I'll leave things here and deal with that in a separate post.

Disclosure: I own shares in Future Bright. No one is quite so crazy as an investor with a large underwater position in a stock he likes so please do your own research and draw your own conclusions.


128 comments:

  1. "food souvenirs in Macau", 5.58billion$ market? then it seems to be wrong (comparing 2billion$ great China market cited in NYT article.

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  2. Probably different currency qouted.

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  3. 1. USD in article vs HKD in the post.
    2. Mooncake in the article vs food souvenirs in the post.

    The assumption is that the average visitor spends US$23 on food souvenirs. It might be high, but not unreasonable. Worth noting that this doesn't factor in what the non-tourists (i.e. Macau residents) spends in Macau on mooncakes and other food souvenirs, so the actually average spend per tourist is probably much lower. Prices seem to be US$40 to US$100 for mooncakes, and I've seen people buy 10 boxes of them when visiting Hong Kong, and I imagine the same might happen in Macau, so the numbers can quickly add up.

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  4. What will the impact of their central kitchen be? That could add another 2-4% of revenue down to FCF? Seems like cost savings alone from that could more than justify current valuation.

    Why is this so cheap? Is the market pricing in something else that we might not be aware of? Some sort of political risk, since Chan Chak mo is a legislator? Could there be locals who sold this stock off think there is a real risk he will be targeted soon by Xi's corruption campaign? The whole flies and tigers thing (mr Chan would probably be a fly in this case). Could that be a black swan risk that might sink the investment even at these prices?

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    1. Central Kitchen -- as you say, it could add another 2% to 4% in FCF through unit cost reductioon. Its main purpose as I understand it, though, is to make possible a push for the casino staff catering market. Whether that actually comes to pass, though, is anyone's guess.

      Why is this so cheap. Clearly I had no expectation that the valuation of this company would be pushed down to cash in the bank so I'm clearly no expert on what the market is thinking. But here are some candidate ideas:
      -- FCF outflow + negative earnings ==> even cash in the bank is illusory
      -- It's entirely or mostly exposed to the fate of VIP traffic
      -- It's a restaurant business so fixed costs so margin compression
      -- If I want exposure to a Macau recovery I'd rather go for one of the concessionaires
      -- The stock has sold by so much that there must be a good reason for it
      -- one would never find it in a screen
      -- etc

      CCM's position as an indirectly elected legislator and head of the local food & beverage association certainly has some tail risk associated with it but not, I think, from Xi/the mainland. The formal relationship between the PRC and Macau is not at the stage yet and, of course, there is no hint that CCM has ever done anything improper. It seems tome that his relationship with the Ho family, and with Stanley in particular, is what has propelled him to where he is now.

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    2. One of the other risk is that management will run money losing positions in key casinos for a few years which creates negative drag on results (unlikely given what they have done in the past but not impossible for them to hold on to locations in the likes of Lisboa even if they stop making money there in current environment). The only way to make sense of current valuation is to believe that the Hengqin food plaza idea will turn out to be a flop (negative value) and the restaurants are worth negative value (keep running losses for foreseeable future) or Macau growth just stops and new casinos in Cotai remain empty in future. All truly hard to envision

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    3. It's not so easy to lose money on the casino restaurants: virtually all of the costs -- all but kitchen staff and depreciation -- are variable: i.e. food cost, rent, wait staff. So the minimum value in any plausible scenario is that the casino restaurants are worth zero. if it turns out that mainland VIPs have been skulking in food courts and student canteens, picking up the ladies and artificially inflating the revenues at those locations, then the rest of the Macau-located restaurants would also be worth zero.

      Your broad point about hanging on to the Lisboa, however, rings true to me. Kanysia Investments -- i.e. the two VIP restaurants at the Lisboa -- is the predecessor to Future Bright and CCM has owned it, and made good money on it, since 1998. Given that SJM will be opening a property in Cotai in 2017/8 he'll want to hold on to the Lisboa restaurants no matter what in order to facilitate the concession of restaurant space at the new SJM property if not for the sentimental value.

      https://www.dropbox.com/s/xqr2juu2ijgq8ja/Audited%20Statements%20of%20Kanysia%20Group.pdf?dl=0

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  5. The future is bright like I said. Don't miss the forest for the trees. An exceptional excel sheet black belt is no substitute for some silent deep thought and standalone common sense. Perhaps platitudes perhaps not. You are a smart guy, I'm sure this episode would have taught you a few things that will save you a lot of money in the future. Personally, if I don't make mistakes, I don't grow. So I hope that is true for you as well. /Peace.

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  6. Hi Red,

    Wells Fargo shares has fallen aprox. 20% since August 2015. Now is trading more or less 10 times earnings. Have you take a look to the option chain. Maybe a great chance to make money without to much risk. Wells Fargo as you like is low cost producer an has a great economies of scale.

    David

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  7. Hey Red,

    Ever taken a peek at CF? Similar idea to Olin - cheap natural gas feedstock, serious share cannibal(reflexivity here is insane, like FMC/HMHC), significant m&a upside through tax inversion/synergies(and >50% NA market share post closing), and CHS private deal implies public market is incorrectly valuing just the standalone business. Macro guys seem to like it a fair bit as it is long USD, short gas, and easily hedged through peers. Can see a path to >120 by 2020. The short side is expressed decently by Blue Pacific Partners on their website and SA. I'm personally waiting on the merger to close before reassessing a position.


    Loving the new Tracking Portfolio btw- and thanks for the FMC and HMHC tips. Long both and hoping for lower prices to boost buybacks.Now if CEQP management would just cease enriching themselves and repurchase stock for retirement...

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    1. Another interesting idea! The CHS valuation is the very first thing that caught my eye. Thanks.

      Honestly don't know how I'm going to fit in some of the names in my backlog. ADL suggested in the comments section of one of these posts that I look at GSL and DAC (thanks ADL!) and I like GSL at this price/time and want to do the idea justice. Ditto HMHC which is a little too small a position right now. I'd also like to ease my way into a suitable sized position in Eqstra over the next two or three months. Ah well.

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    2. You're very welcome, Red; I'm still pretty firmly in the debit column to you in terms of ideas and approaches. I've been looking more at GSL and increasing my confidence and position size. DAC management commentary offers a good way to check on some of GSL's assertions re: market strength for smaller vessels, etc. Next data point coming up for GSL is late Feb/early Mar declaration of Q4 dividend--if 12.5c, then my comfort with management will be much higher, as it'll show they deliver what they say. If there are charter-attached bargains out there and discounted debt/pref stock available to repurchase (big ifs) I don't think the best use of their capital is necessarily paying out at ~28% yield (though they're a wasting-asset co, so might not be the worst), but since it's very much a show-me story the raise would help illustrate their credibility and model. Based on their communications during the past few years, I do think they're fairly sensitive about overpromising.

      Anyway, your posts and commentary are always great reads.

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    3. I've been thinking that the distribution may be a way of allowing CMA CGM to recover its charter rate "losses" and so preventing it from making (another) run at the company. In any case, we'll see how it plays out.

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    4. Well, we have our answer. I may hold onto my shares because this is deleveraging quickly and and appropriately, but boy was I wrong on management stance. My apologies.

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    5. Don't apologise. It was, and remains, a good idea. Some work out as soon as one hopes they will and some take longer -- that's the nature of things. As long as CMA CGM knows what it is doing with the NOL acquisition this one will work out just fine in the end. More of these ideas, please :)

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    6. Thanks, and pleased to hear that you agree that this still has some significant upside potential resting on operational execution, now that financial execution has been somewhat clarified, albeit not as I anticipated.

      Another idea I find very interesting is BPT on the short/put side. The formula (in SEC filings) which determines what the trust receives and hence pays has them mildly underwater so far in 2016; my back-of-envelope math says that WTI needs to average roughly $35/bbl for March for them to break even, with distributions only if the average is higher. What I like about this is how mechanical it is: the world provides all your inputs (formula for determining allowable costs, WTI price and history) with the wild cards being tax rate (which is narrowly banded) and make-whole of prior-period underpayments (have been small, but one never knows).

      Plus there is investor psychology--a cut to zero would, I think, rattle many holders, but a cut to a ~2% yield might satisfy some people, who'll think "it'll come back when oil comes back" (true, to an extent, though the formula for allowable costs deducted from receipts means that current trust price is baking in much, much higher oil prices in future). You can also be reasonably confident that the next dividend announcement will be in the first week of April. This is not an especially obscure trade but still seems an interesting trade to enter at month's end if the WTI price has held below, say $34.

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    7. Nice. Ill have a look. Thanks

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    8. Re: BPT, there's good, and there's lucky. Frankly a bit surprised by the magnitude of the recent decline, though I'm still watching WTI; with new apparent investor awareness, this may actually revert to approx NPV ($11 at WTI of $50, so less now) if the distribution is nonexistent/de minimis. We'll know more in early April.

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    9. A partial victory for arithmetic! bet you made a bundle:) I missed out on the GNI trade a few years back and now this.

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    10. Rubycap, if you're still in CEQP there some are personal income tax consequences to consider as a result of the asset sale. I'm out at least until after the transaction close date is announced and maybe until after it has come and gone.

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    11. Thanks for the heads up. Ive sold in taxable accounts also.

      Congrats on a great start to the year!

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  8. Do i have this right about HMHC (I am always suspicious of FCF and ebitda when there is no earnings), they are best in class vs competitors (right now at least). And the reason their income statement looks ugly atm is because they are moving more towards a digital subscription model?

    Once the subscription is running, costs will rapidly come down over the life of the subscription as a lot of costs are not spread out over the life of these subscriptions?

    So at some point in the next few years earnings will actually start to match up with FCF? And it seems the biggest initial (but mostly non recurring) costs about these subs are marketing and r&d? Once a subscription is running, all they need to do is keep quality of their content up vs the competition. So little marketing and less R&D required.

    So somewhat like the customer solution profit model from Art of profitability?

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    1. Not quite. The costs are what they are. It is the revenue recognition that is the issue. Under traditional circumstances, you sell a product, collect the cash, recognize the revenue, and expense your costs all in the current year. In the digital model, you sell a product, collect the cash, and expense your costs in the current year BUT you don't RECOGNIZE the bulk of revenue in the current year. Instead the revenue is recognized over a multi-year period. Here's a primer: https://www.dropbox.com/s/11ynamccxnbf52d/McGraw%20Hill%20Primer.pdf?dl=0

      I don't know that there is a meaningful best-in-class distinction between the major players in K-12. The important thing in my view is that (1) it is K-12 and not tertiary; (2) it is quite hard to break into the oligopoly (you need experience, scale and a formidable sales force); (3) and the members of the oligopoly have a history of rational competition; and (4) it's not an easy product/service to disrupt.

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  9. Red, if you don't mind it'd be interesting to hear how do you get anywhere near $2.5/share FCF in 2016 (or 2017)? With large buybacks that'd mean $250-300m in free cash flow, and I'm struggling to see how they'd get there. I'm seeing capex between $150-200m and cash flow excluding working capital changes around $250m ("cheating" here to make the cash flows more steady..). So let's say capex will come down to $150m, meaning that cash flow would need to be +$400m to get to that $2.5/share. Am I missing something crucial or do you have a very different view on some part(s)?

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    1. Here's a simple model using management guidance. The important variable is buyback activity and they have a $500M authorization that they really ought to have mostly used up by now. I have assumed that they reauthorize and implement $500M in buybacks annually (50% of available capacity)because that's seems to me to be the best way forward. It may be, of course,that they blow their cash flows on silly acquisitions instead in which case the upside if substantially less..
      https://www.dropbox.com/s/s2egeibu6160qcf/Houghton%20Mifflin%20Harcourt.xlsx?dl=0

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  10. Red, just wonder if you hedge USD-HKD with your continued addition of the HK-listed stocks? Recent report seems to suggest that HKD could be subject to one-off devaluation/ re-peg as much as 20-30%.

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    1. Icosa096, how would you hedge usdhkd most effectively please?

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    2. I don't hedge for currency since if I'm buying shares in another country it's because I think it is priced low enough that currency movements won't make a material dent in my margin if safety or upside. (MCR.V is testing that conceit to the limit, mind you).

      I'm more attracted to hedging the operating aspects of businesses and I do it in oblique and maybe ineffective ways. So Future Bright started its life in my portfolio as a hedge for Keck Seng (Hengqin is accross the water from Keck's condos and if Hengqin becomes popular with Macau residents Keck's condos may lose some value). And Paradise started its life as a hedge for Future Bright (grind mass v VIP).

      Or I picked them over some other cheap stock because of currency. So if RMB depreciates then Haichang wins (domestic vacations rather than trips to Tokyo or wherever) and offsets weakness from Texhong.

      Or they earn in USD like SingShip and Global Testing or Opus Group so that they arenaturally hedged.

      Or, like Nirvana Asia, they have 1/2 its mkt cap is in cash denominated in USD so that it would be buying burial facilities in MYR and INR -- same jind of idea.)

      Etc. A very unsophisticated approach, I'm afraid.

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    3. ps if you like the idea that KD will re-peg 20% one way to play that is to find an export business where operating leverage will mean that it will benefit 2x or 5x or 4x from such a movement. Like Goodbaby maybe.

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  11. What would be the thesis behind HKD overvaluation? I also heard some say it is undervalued. How do you even evaluate that? Isn't currency value mostly related to import/export balance? As currencies always seem to collapse when export values collapse? And they go up when exports go up, like with the RMB in the past years?

    It seems here that to maintain the peg:
    http://www.bloomberg.com/news/articles/2015-09-01/hkma-buys-800-million-to-defend-the-hong-kong-dollar-s-peg

    This seems to imply that as well:
    http://www.economist.com/content/big-mac-index

    They sold HKD for USD to maintain it as it was about to break the lower bound? Which would imply undervaluation more than overvaluation? And it seems the large financial industry in Hong Kong will probably keep the currency stable?

    Not really planning to bet on this one way or another, just interested in what the thesis on overvaluation is.

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    1. Overvaluation/Undervaluation is a bit of a red herring except in the long term. Two or three medium term pressures on HKD: capital outflows and relative strength v RMB. If HK is the gateway to PRC and PRC is perceived as more risky then currency devaluation is one way to absorb the risk premium. If HK is exposed to PRC demand and HK prices rise when denominated in RMB then devaluation is one way to restore demand/supply equilibrium. OTOH, HK depreciation brings its own problems over the long-term -- its perceived riskiness is exacerbated, etc. So it's a tug of war. Sometimes ST considerations outweigh LT ones and sometimes not. In this case, the ST pressures from capital outflows and reduced export demand may win out.

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  12. Hi Red.

    I see that you have recently bought a position in Global Ship Lease.

    Global Ship Lease also has a Preferred share (GSL-B) currently yielding close to 20% - almost the same as the common.

    Right now the common trades at a price/book close to 1/4 and the preferred trades at close to 0.50 of par.

    Clearly the common has more potential upside if nothing goes wrong, but the preferred has a little more safety.

    Do you have any thoughts about the preferred? At what price would you consider the preferred equity over the common?

    Thanks for blogging.

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  13. Hi,

    I think* I agree with you that the preferreds are safer than the common (& better value, too, pound for pound). I decided, though, that given my cash poor circumstances at the moment, a smaller position in the common was more useful to me, on balance, than a larger allocation to the preferreds.

    *My rationale was rate of recovery of my investment before the debt maturity wall in 2019. I think the common recovers virtually all the principal before then. The preferreds recover the majority but nor virtually all. On the other hand, I would be quite surprised if rolling the debt was problematic in 2019 since the NAV cover will likely be substantial by then.

    Thanks for reading

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  14. How does this play into CEQP:
    http://www.ogj.com/articles/2015/12/tesoro-to-acquire-great-northern-midstream.html

    Does this make it more unlikely they will extend their contract with Tesoro, it seems that could seriously impair the thesis? Quicksilver is filing bankruptcy, and it seems Chesapeake is under pressure as well? Im kinda worried that as pressure holds up on O&G industry, the leverage could blow up in their face. Both Bakken and Marcellus where they get most of their cash flow from are currently declining heavily.
    https://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf

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    1. "seriously impair the thesis?"

      Which thesis?

      If you're referring to the thesis of the fellow at Raging Capital then he has laid out what he thinks about each of those issues here:
      https://www.ragingcapital.com/wp-content/uploads/2015/12/CEQP_final.pdf

      Mine is that they sell assets, reduce distributions, take the cover up above 1.25x and lean on the Delaware Permian JV in the out years. This assumes that they know what they're doing and that they are not thrill seekers -- assumptions which may or may not hold up.

      In any case, of the stocks that I own this stock is the one that needs the most detailed consideration and care. Particularly important not to get caught up in other the other people's narratives, including mine. Which is why I'm not going to write it up.

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    2. Good call on CEQP -- they've done exactly as you suggested they should. I sold because of uncertainty about the tax issues, which I think you mentioned elsewhere. Have you seen any commentary on what exactly the tax consequences will be? I'm no tax expert, but I understand the concern to be that the asset sale may produce "income" at the CEQP level that will be passed through to unitholders who own on the day the transaction closes, which would create a taxable event for them, even though there would be no associated distribution. In other words, its the reverse of the normal MLP situation in which their is a distribution but no pass through taxable income.

      Is this your understanding as well? In particular, will the asset sale produce pass-through income, or might it produce a pass through capital gain? If it's actually a capital gain, then some investors may be able to take advantage of the situation by buying units in a tax-deferred account, which normally would be inadvisable because of UBIT.

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    3. That is understanding: the gain on sale will likely have pass through tax consequences for unit holders in the way that you describe. There may be a way to handicap the per unit tax burden and the allocation between "ordinary income" and "unrelated business taxable income" but I thought it easier to let the transaction closing date come and go and see where the unit price is then. no doubt sooe of the questions in the earnings call will focus on this issue: closing date, record date, gain on sale amount, etc.

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  15. Thanks for sharing your work, Red. It is greatly appreciated. I am looking at the Future Bright thesis and what jumps out at me is the Hengpin land value. It looks like they spent about 280 million to buy the property and will spend roughly the same amount to build on it. You are arriving at a value of 4,415 million after all is said and done. That seems like an incredible return on investment - multiplying the total investment by a factor of almost 8x. I can't but help wonder when I see figures like this that I must be missing something. Can you please explain to me how such a return on their investment is possible and what might be the risks involved with that investment?
    Thanks!
    David

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    1. Sorry for the delay, David. one one side of the bridge is overcrowded, more or less privately owned real estate that is among the most expensive in the world. On the other side is more or less barren land that is government owned. So the basic idea is (1) that the relaxation of barriers to movement and ownership of land rights will narrow the gap between real estate values in Macau and Hengqin. (2) there are two ways to acquire the riights to the land at dirt cheap prices: (a) foresight, as in the case of Shun Tak; and (b)a government subsidy, as in the case with Future Bright.

      The Zhuhai and central governments want the development of Hengqin to happen in a coordinated way and in the near immediate future so they have auctioned off the land as below market rates. In exchange the selected/winning firms commit to a strict timetable. There was a long line, it seems, for the part of the auction that was reserved for Macanese businesses and FB didn't get the 150,000 sq M that it applied for.

      Obviously my estimate could be off by + or - $1/share but I think it's in the ball park. Since it's also not in any way built into the current share price I think there's time to see how Hengqin plays out. The Chimelong Ocean Park is already quite successful -- it looks like it attracted >4m visitors in its first year..

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    2. Hi Red,

      Quick question, how did you arrive at the -92m FCF for Hengqin each year from 2016 to 2018? I believe the disclosed estimated investment was HK$1,119m which equates to ~HK$850m after subtracting land cost.

      Best,
      JC

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  16. What are your thoughts on Enterprise group this low? Especially with Jaroszuk buying over a million $. Or is that thing toxic at any price to you at this point?

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    1. Sorry for the delay. E is not for me at any price.

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  17. How do you get comfortable with the ethanol element in the equation. All these nitrogen companies list this as a risk in their 10k's. It seems this ethanol as fuel craze is very irrational and will probably not survive long term? Especially if electric cars start to rise. What happens if prices of nitrogen fertilizer are reduced back to the level they were 10 years ago if corn demand would go down? Those companies won't look so cheap then?

    when researching these companies I found myself worrying too much about where commodity prices would go. Usually when I start searching all kinds of corners of the internet to try and make predictions on that I know I should pass. Would love to hear your thoughts.

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    1. Short answer: (1) as you know from your research it's cheaper, from refiners' perpective, to use ethanol for refining than to no use ethanol; (2) RNF is priced at 3x dividends (or less, depending on the value of Pasadena) so one recovers one's investment in ~3 years and technological/structural change in the years beyod is not, I think, a risk for this investment at this price.

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  18. How are you able to maintain a -50% cash position? How much margin room do you have?

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    1. I guess this is just an accounting glitch?

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  19. There's seems to be very high volume around Future Bright in the last couple of days... Hopefully this is prelude to decent news...

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    1. They just issued a profit warning:

      http://www.hkexnews.hk/listedco/listconews/SEHK/2016/0222/LTN20160222321.pdf

      Chris

      Delete
    2. Thanks Chris. I'll have a look.

      Delete
    3. Every item on track except overhead which was ~2M higher than I thought it would be.

      Delete
  20. Noticed you're out of HMHC, anything that's changed your view? Or just redeploying funds into better risk/reward situations?

    ReplyDelete
  21. Just redeploying to shorter-term opportunities, not necessarily better ones. HMHC is compelling value imo.

    ReplyDelete
    Replies
    1. Awesome call on LXU! Kicking myself I didn't take a look.

      Delete
  22. Ditto Haichang? Don't think we get a pop on annual report anymore?

    ReplyDelete
    Replies
    1. Ditto Haichang. I think there will be a pop with the AR. Shanghai, at least, is not in the price so the price is clearlt & materially wrong. Just want to try to grab one or two other opportunities this earnings season before I settle back into the gentler names like Haichang & Mifflin.

      Delete
    2. Gotta love how the market promptly rewards you for being right in N America, vs places like HK where its an absolute crapshoot. Do you mind sharing your thoughts on fair value at LXU? I'm seeing something in the 20's but considering lightening up here.

      Thanks

      Delete
    3. Hi Ruby,

      $28 to %51 depending on input prices at the time that they convert the chemical segment into an MLP. (My best guess is %40 when all is said and done) It's not safe yet, I should emphasize, since if the ammonia plant is delayed the creditors are perfectly poised to take control of the company. But the idea is that there will be a steady drumbeat of developments starting in early Q2 -- ammonia plant up, refi, spin of HVAC, MLP of Chemical -- compressed in a 24 month window.

      HK v US. Right, paradoxical. Crappier set up with better quality counterparties vs the inverse.

      Delete
    4. In the US and in large-cap UK & Aus universe investors look foward. Everywhere else they look back (and run regressions). The longer I do this the more convincing I find that narrative.

      Delete
    5. Interesting insight.

      Do you think that's because the small-cap universe is dominated by less sophisticated investors (ie. retail) that won't be building models and having a go at forecasting earnings?

      And perhaps in Asia the analysts there are of lower calibre compared to more developed markets?

      Delete
    6. I think people do what other people around them are doing -- cultural practice rather than skill.

      I'm not convinced that skill plays any role in investing. I doubt very much that, if you strip out the chart-based daytraders, professional investors are any better than retail investors. We know that sell-side outperforms buyside pretty much everywhere and over any reasonably long time period - and this despite the fact that the sell side has to express an opinion on every stock and the buyside doesn't.

      Emerging markets -- company market shares more in flux, more exposed to exogenous factors like currency, inflation, regulatory regimes, real GDP acceleration/deceleration, etc. So I suspect the instinct is to have a greater tendency to hold on to the tangible -- NAV and last reported earnings. "I bought X at 30% of NAV", "I bought Y at 5x earnings" are statements/concepts you can defend in a meeting or in a memo.

      I suppose that, over time, EM will become less undercapitalized and more proportionally more money/people will be examining the pool of available securities and that will push folks to think more and more about what will be reported next year and beyond as against what was reported last quarter.

      Delete
  23. Thoughts on Texhong, seems like roughly 900-1000m in net profit, not counting the 200m charge. Debt seems quite heavy.

    ReplyDelete
    Replies
    1. http://quinzedix.blogspot.com/2015/09/texhong-textile-update.html?showComment=1457564128262#c4860538212150785594

      Delete
  24. I read that you sold out DWSN. Some particular reason, if you don´t mind the question?
    Thanks.

    ReplyDelete
  25. Annual results out for Future Bright. In the Chairman's statement, it talks about Hengqin, saying that as it is reviewing and considering its options, all options and alternatives remain open. I wonder what these options and alternatives are.
    It is possible that Hengqin is not developed solely by Future Bright, meaning less investment sooner and less profits later.

    ReplyDelete
    Replies
    1. Right -- that was the original idea in any case. He doesn't want people to worry about FCF so he's reiterating.

      Delete
    2. I suspect they might be considering another round of rights issuance to raise cash for the project should they not be able to find partners on Hengqin, as they have done many times in the past..

      Cash has fallen further and yet they are still paying dividend.. in a loss making year.. with various capex demand coming up over the near term..

      Delete
    3. Well they did say they were considering all options and alternatives. However, I feel that at these prices they would be selling the company out too cheaply. They have other options, such as scaling back the capex or selling some interest in Hengqin. Hopefully they will not raise equity here.

      Delete
    4. Feelings are fine and you chaps are welcome to discuss the potential for dilution back and forth amongst yourselves. I do think, however, that the conversation would be more interesting if it at least touched on the matter of the debt covenants -- disclosed in the annual reports -- which prevent a dilution of Chan Chak Mo's ownership of the company.

      Delete
    5. Not sure if the two Anonymous above are the same person, but I believe by equity he is referring to a rights issue, so Chan's ownership would remain unchanged and the debt covenants would not be an issue. Tough decision whether to participate in a rights issue or not (if it does happen). On one hand, the stock is cheap and one wouldn't want to be diluted down at current prices. On the other hand, it would be throwing good money after bad if Chan does not stop burning money.

      Anon #3

      Delete
  26. 703 : Nice rebound from lows on decent volumes, and a fresh article published today on SumZero" by Derek Lin, Surveyor Capital: "Leading Macau F&B company trading at 7x P/E and 0.4x P/TBV due to macro + internal factors on verge of turning around due to stabilizing sales and minimizing loss-making businesses."

    ReplyDelete
    Replies
    1. Thx for alerting me to the SZ piece. Long way to go yet; investors will focus on the fundamentals once the share price has gone up a bit more.

      Delete
  27. For anyone following 0184.hk:

    share price = ~$5.50
    excess cash per share = ~$5.00
    Stub = Mkt cap less excess cash = $0.50
    FCF = $0.70

    Q: what will they do with the $5 in cash? Buy distressed properties (=good)? Buy trophy hotels (=bad)? That will determine sentiment over the next couple of years.

    Probable sale of Macau apartments in 2018 and probable special dividend equal to market cap at that time so above Q matters in the interim only.

    ReplyDelete
  28. Hi Red, I noticed that the CC prices are scheduled for another large decrease based on futures for delivery in July and August (10.3k RMB per ton). This will presumably impact Texhong's results again for a few quarters? I am hoping the rally in this stock continues for a little longer, but will then take some profits.

    I'd also be curious for your views on Paradise Entertainment. Reading through their 2015 financial results, I struggle to see the upside in the Casino Services segment (where the major casino groups are presumably increasingly competing against PE for mass gaming market share).

    ReplyDelete
    Replies
    1. The way in which the company presents its results is a little awkward so I'll write Paradise up and unpack the drivers over the weekend. For quick reference you might compare Kam Pek's GGRs from 2012 and 2015 (in the earnings presentation slides) and come to some conclusions about what it is earning today.

      re: competition: Paradise operates in the $20 (twenty) - $300 per hand segment of grind mass whereas the other casino groups operate in the $500-$800/hand segment. Threat of competition is small especially since the ability to generate free cash flows at $20/hand is really only possible by mass deployment of Paradise's proprietary LMGs.

      re: Texhong Maybe. Relative prices of CC328 and Cotlook A have flipped, though, so that might offset the FIFO effect. In a couple of years the market will likely offer $20-$30/share for the shares. In the interim, who knows? I decided to keep all my shares last year when its spiked to >$11 only to see it fall back down to <$5. So hard to say: depends on what else is in your porfolio, what your position size is etc.

      Delete
  29. How do you factor in the massive labor cost increases? It seems marketing is broken out separately and labor cost has increased by 18% in 2015 and is forecast to rise by 15% in 2016 and 2017? They already decreased marketing costs. Before the stock looks cheap they need to lease quite a bit of LMG's to make up for that? Most of their costs are probably labor costs? They do not give a whole lot of information on this, but I would love to see your reasoning on why Kam pek and Waldo are doing 2013 margins in 2016 with labor costs that are much much higher now.

    ReplyDelete
  30. I am surprised that you're asking me about Kam Pek and Waldo in 2013 when I had suggested looking at Kam Pek in 2012.

    ReplyDelete
  31. Well in that case there would be an even bigger difference in labor costs and my point still stands. Not a good sign that you seem to avoid going into details when actual results diverge so much from your prediction.

    Also kind of strange that their website seems to be hacked? If I google it I get strange results.

    ReplyDelete
  32. You've probably already seen this, but from the CEQP press release (I did not listen to the call):

    Update on Joint Venture Tax Implications

    The transaction will result in an approximate $600 million taxable gain being allocated among Crestwood’s unitholders during 2016. Based on management’s projections and assumptions, Crestwood anticipates unitholders who purchase CEQP units in 2016, and hold such units throughout the remainder of 2016, will generally not incur any tax liability with respect to the transaction or its eventual use of proceeds, considering deductions to be allocated to those unitholders. For unitholders who are allocated a taxable gain related to the transaction and its use of proceeds, Crestwood believes that many of these unitholders may be able to utilize 2016 allocated deductions and previously allocated passive losses (which total $900 million in aggregate since 2013 between Crestwood Equity Partners LP and Crestwood Midstream Partners LP) to offset a substantial portion of that taxable gain. The ability of each unitholder to offset all or a portion of taxable gain will depend on their particular situation, including when and how the unitholder acquired its units and the ability of the unitholder to utilize passive losses. Unitholders are encouraged to consult their tax advisors with respect to these matters.

    ReplyDelete
    Replies
    1. That's interesting. Thanks for posting.

      Delete
  33. Any high level thoughts on the UK real estate agencies? CWD, LSL, FOXT, MCO, etc? All of them have been crushed by Brexit and slowdown in the housing market, especially in London. Obv. London property prices are really really high (bubblish?) but transaction volumes are still way below LT averages and population continues to increase. Problem is I'd imagine the cost structure for most of these agencies is relatively fixed since its essentially just employee costs.. FOXT (London focus, high fees, no debt) and MCO (franchise revenue) seem particularly interesting. Curious if you have looked at either of these, or have other thoughts on the names in the space?

    ReplyDelete
  34. I don't, unfortunately. I looked at them three or four years ago and suffered brain damage. A lot of exogenous factors to think about and I saw no easy way to arrive at any firm conclusions one way or the other.

    ReplyDelete
  35. Hard to guess what impacts will BREXIT brings to us in the long term. But in the shorter terms, it will hit the UK property market badly. Gold will rise and forex opportunity is there.

    ReplyDelete
  36. Do you know why Keckseng is down 10% ? Maybe it is time to buy more

    Thank you

    ReplyDelete
    Replies
    1. It's low volume so up/down moves tend to be more impressive than they would otherwise be. I think Keck eng is good value and the lower the share price the better the value. I think that the important variable to track is gaming demand in Vietnam and the recent news -- i.e. legalization of gaming for VN citizens -- is a net positive.

      Delete
  37. You might find interesting this 36 page hedge fund report about Keckseng

    https://es.scribd.com/doc/310386678/Keck-Seng-Investments-Heller-House-Investment-Memo-4-7-16

    Thank you ;)

    ReplyDelete
  38. Lets not beat around the bush....Keck Seng below HKD 6 is a screaming buy, a gift from Mister Market or lack thereof, one of the most mispriced securities in global markets I reckon. The price has just dropped 10% because there was a seller last week and the true free float is tiny and getting tinier. Price is completely disconnected with the reality of both assets and earnings. Recurrent, highly predictable earnings are between 0.50 and 0.70 per share, with great diversification between Vietnam, the US, Macau. Keck has moat in those 3 sectors/geographies, and a value capital allocation mindset. I am not even talking about NAV which I estimate well above 20. Throw in a hard catalyst in the form of the Macau flat sales resumption when the HK/Macau bridge is finally completed, possibly in 2017, and you get maybe one of the most compelling trades of the summer.

    ReplyDelete
  39. Chevalier,

    I agree that there appears to be a disconnect between the private market value of Keck Seng's assets and the cash flow they generate, on the one hand, and the market price of Keck Seng's equity, on the other hand. But what is the mechanism by which minority shareholders like you (and me) will see the disconnect closed? If this were a U.S. company, the answer could be, for example, a management buyout of minority interests funded by newly issued company debt (or, more likely, the stock wouldn't reach these levels in the first place). But what is the event, catalyst, etc. that is actually going to create a return for minority shareholders? Is it an increasing dividend?

    There are, of course, companies whose public equity prices appear to reflect the value of the company's assets, even though there's no realistic expectation that shareholders will ever see any significant cash flow (dividend or buyout) from the security, e.g., Berkshire Hathaway. But I don't think that reasoning generally applies to an HK property company with a tiny float.

    ReplyDelete
  40. The return will always be a combination of capital gains and dividends.
    Increased dividends are certainly on the cards as thanks to smart acquisitions (W in SanFran, Sofitel in NY...) top line and core earnings gently grow at an annual pace of double digit. I believe dividends will start increasing again, they were 0.07 in 2006, plateaued at 0.20 in 2010/2011, now 0.15. As you know this dividend yield is key for HK investors so I would think a rerating would follow. A superdividend is not totally out of question, there is some precedent (1998 I think?). That could happen for instance with a sale of the entire Macau flats bringing in close to HKD 4 that Keck would maybe struggle to re-invest at attractive yields.Lets call that a catalyst.
    Otherwise clearly it is a very long term waiting game, just like with so many of those patriarch-founded-HK holding-70s or 80s listed small caps. It is not for the impatient investor for sure. As tangible book value and core earnings grow and management keep on demonstrating their skills and does not misstep, if the market price does not move up the discount in time widens from an already extreme point and at some point smart money start to notice. There has been a few value mutual funds or HF starting positions in Keck the last 2 years. At board meetings and through communications, top management will gradually feel some pressure to better show to the market the value of their assets, earnings power and talent. It could help Keck gain a bit more visibility.

    ReplyDelete
  41. Seems like high end restaurants are dead, food souvenirs hasn't been growing for some quarters now? So that leaves their more low (margin) end restaurants, their Macau building and Hengqin to provide the upside here.

    If you cancel the one time expenses (if they quit their failing projects quickly) it seems they barely make a profit.

    Barring some sort of serious recovery in Macau. It looks low risk, but not nearly as juicy as you made it look in your post. There seem to be some difficulties with their Hengqin project as well. And that will take some time to complete.

    Given the large discounts these Hong Kong property companies seem to get, you still like it as much?

    ReplyDelete
  42. Red,

    Could you please explain a little bit your sell in Texhong. It´s seems a share to hold almost for ever, and still a long way to go.

    Thanks.

    ReplyDelete
  43. David, I think you are right -- there's still a long way to go and one can hold it for a number of years and earn maybe 20% to 25% returns from here.

    You can see here that cotton prices have been rising and that is a positive for Texhong's profit in the next few reporting periods
    http://www.cottoninc.com/corporate/Market-Data/MonthlyEconomicLetter/pdfs/English-pdf-charts-and-tables/One-Year-of-Daily-CC-Index-Prices.pdf

    When I sell a stock it is 90% of the time because I am trying to satisfy needs elsewhere in my portfolio. I have too much money invested in the market, for example, or I need to manage/counteract my exposure to oil & gas shorts (LXU, RTK, FLYB). Sometimes it's because I think I have a sense of when particular ideas will play out and by how much. Or because the market's pricing of my other holdings is highly volatile. Etc etc. It's just a matter of what else is going on in my portfolio as a whole and therefore my exit from the Texhong position is unlikely to be interesting/relevant to any other investor. If I ever do change my mind about Texhong's fair value (~$25) I'll say so in a post.

    Thanks for the question

    ReplyDelete
  44. 20% to 25% ANNUAL returns, obviously

    ReplyDelete
  45. David (& anyone else owning this company),

    Miscellany

    -- Daiwa has raised its 2016 price target to $16.50
    -- the company participated in a roadshow (i.e. a presentation to analysts) yesterday and will participate in another roadshow in the last week of August

    Fundamentals,
    -- Company has guided 600,000 tonnes of yarn production for the fiscal year, implying ~28% production jump in the second half
    -- Gross margin in the second half should approximate 19.5% in my judgment
    -- Debt should come down by $500M this year
    -- Company has guided 670,000 tonnes of yarn production for 2017 (I think 19% gross margin is appropriate in a stable cotton price environment)

    Pricing
    -- 2017 will see contributions from its downstream operations, FCF>earnings, and the company should therefore enjoy higher multiples on its earnings
    --> ~ HK$ 1.65 EPS x 12 = $20 price target in 2017 is my best guess

    ReplyDelete
  46. Thanks for keeping the updates coming, even if you're out. I've stayed on (after a double--thanks for that) and your continued commentary is much appreciated.

    ReplyDelete
  47. Thanks a lot and learning a lot with you.

    ReplyDelete
  48. And also this:
    https://www.dropbox.com/s/62fkvwl59npxzo3/China%20galaxy%20Aug%2016%202016.pdf?dl=0
    the transcription/reporting of management's views and explanations is more interesting than the analyst's model, imo

    ReplyDelete
  49. Red,
    cost
    One question about the value of hengquin property: When you analyze this value you use the construction building cost but not the cost of the land. Don´t you have to add this last cost?

    Thanks.

    ReplyDelete
  50. http://www.ggrasia.com/mass-led-ggr-recovery-starting-in-macau-dbs-tang/

    Interesting "green shoots" article. Karen Tang has been the most realistic/pessimistic analyst on Macau over the last couple of years (and generally correct in my view).

    ReplyDelete
  51. Ah yes,I read her latest note a few days ago. Thanks very much for sharing.

    ReplyDelete
  52. http://macaubusinessdaily.com/Macau/Golden-Week-not-so-glittering

    Article on food souvenir sale during first 3 days of goldene weeks

    Food souvenir sales down
    Meanwhile, food souvenir shops like Macau Yeng Kee Bakery, a local brand run by Hong Kong-listed Future Bright Holdings Ltd. also experienced a similar situation in terms of sales during the first three days of the holiday, Ms. Lau, a senior shop assistant, told Business Daily.
    “We had more tourists coming [yesterday] than over the weekend, with an increase of 30 per cent,” the senior shop assistant noted.
    However, according to Ms. Lau, overall sales at her store have registered a drop of 20 per cent, compared to the same period last year.
    Ms. Lau explained that although more Mainland Chinese tourists are visiting the bakery during Golden Week than on normal business days, they are spending less compared to last year.
    Again, the bakery brand needs to offer promotional discounts in order to attract more customers. “We have offered more discounts than last year, hoping to stimulate sales. We still see customers coming, but the quantity they buy is not the same as they used to,” the assistant said.
    In her opinion, the decrease in sales at her store may also be due to tourists preferring to buy similar products inside the casino resorts in Cotai, even though the selling prices there are higher than on the Macau Peninsula.
    “The openings of Wynn Palace and The Parisian Macao have had a direct impact on the businesses in Rua de São Paulo, which is near the major tourist attraction of the Ruins of St. Paul’s,” Ms. Lau observes.
    Looking forward, the senior shop assistant believes that the sales figures of her store will remain low for the rest of the year.

    ReplyDelete
  53. You say that earning power is hidden by new restaurant ramp up? But if i look at direct staff costs (not including G&A), and i divide that by square footage, i get roughly 1300-1400 HKD per sqft in direct staff costs (assuming about 230k sqft) for 2015. The same as a few years ago on a little more than half that amount. By that metric it seems they do not have enough revenue to generate anywhere close to your estimates. The decline in their Edo restaurants possibly to blame for this? And most competitors in Hong Kong and mainland do not get above 5-10% profit margins.

    If I take 126 m in FCF and 750m in revenue, that is 16.8% profit margin. This assumes roughly 200 million in direct staff costs. Is that realistic with recent Macau wage increases and the large decline in revenue/sqft? It seems a large part of opening costs are reflected in SG&A and not direct staff costs? This would assume about 860 HKD per square foot in staff costs. It was 1100 HKD in 2012 (and they did not open many new restaurants back then.)

    It is strange because rental costs are still at about 12% of revenue, same with ingredient costs at a steady 30%. But staff costs are 37% of revenue vs competitors 27-31% (operating in tier 1 cities/Hong Kong though). And vs 25% a few years ago for FB. So if we take this approach and assume 30% staff costs/revenue, I still do not get to your estimates.
    Without a recovery in Macau I do not see them earning above 100 million HKD. Assuming 750m HKD revenue for legacy business with 30% ingredient costs 30% staff costs adn 12% rental costs + 90m in G&A, I get about 100m in operating income. But the large decline in revenue/sqft makes this estimate somewhat speculative without direct feedback from the company about this.

    Looking at results of Yeng Kee bakery so far, it seems the food souvenir business is harder to break into than they thought. Looks like it is bleeding money and not growing revenue.

    So it seems this then becomes either a recovery play on Macau and/or a play on Hengqin. Making it more speculative (at least not deserving such a large % in portfolio?) Still cheap, but if you want to speculative on real estate in that area, I think there are cheaper ways to do that.

    As for a Macau recovery, I see exploding Chinese tourism spending, but for some reason Macau is not getting much of that. Do we have to wait for improved tourism attractions in Hengqin? Or that new bridge that keeps getting postponed? Im afraid the temporary ramp up is just the excitement of new casino's opening, and might go away next year. Disappointing golden week spending in Macau seems somewhat telling so far.

    ReplyDelete
  54. Profit warning for q3 is out. Don't see any sign of turn around in legacy restaurant and FS business. What do you think about the outlook going forward?

    ReplyDelete
    Replies
    1. "Don't see any sign of turn around in legacy restaurant [..] business"

      Sales on page 3: 198.9 v 181.7
      Gross operating margins on page 7: 18.8% v 16.8%

      In the context of >13 new, on everage lower margin, stores that's okay

      The smoking issue will come up in the Spring and we'll see how that plays out.

      Souvenirs:
      Disappointing performance from the same store sales. Too early to tell about the new formats/stores.

      The things to watch as time passes are, in my view:
      -- the performance of the ex-Macau restaurants & food court
      -- any complications arising around the Hengqin construction
      These two items could cause material amounts of cash outflow if they go wrong.

      The rest of the business looks fine.

      Keep in mind for future reference that that almost all (90% to 95%) of the cash costs in the Casino restaurant business are variable. Keep in mind also that that business is, at this market cap, essentially free.

      Delete
    2. Thank you Red

      I can see where you are coming from. But SSG has not been growing for several quaters now. What i do not understand is with expected arrival grown of low single digit and increase in number of players in restaurant sector (due to increase in hotel) and rising wages, how do you anticipate revenue and expense going forward?

      Noted on all your points to monitors

      Thank you

      Delete
  55. Altight. First I'd like to settle this "rising wages" issue.

    Here are the economics of the average casino Japanese (Edo) restaurant as recounted by management back in 2014 when people cared:

    https://www.dropbox.com/s/e4oiy6844taflka/For%20Ruangwith.xlsx?dl=0

    I have taken the liberty of paying wait staff a salary of 55,000 MOP per year and kitchen staff 75,000 MOP per year. Too much but let's just use that.

    Let's also imagine that 800 MOP per person buys you a "fine dining experience", It's one go at a premium mass baccarat table, but let's just assume that it constitutes fine dining. The staffing ratios, then are going to be 1 waiter per 3 tables of 4.

    Is labor cost -- let alone labor cost inflation -- important? It doesn't look like it to me.

    --

    How I expect revenue and cost going forward:

    Turnover at the premium restaurants -- Edo, Shiki Hotpot -- will follow VIP traffic in the properties where those restaurants are located. Margins as a % are more or less constant. Turnover per store should settle somewhere between 40M and 60M. Gross operating margin per store should settle between 20M amd 35M. There ought to be 6 or 7 of these so their contribution to company-wide gross operating profit should be in the range of 140M to 240M. (There are more of these stores coming in Cotai over the next couple of years so I suppose these numbers get revised up when the time comes).

    If you look back in time, admin expense was 80M. So, if you through away every other thing-- the cash, the busindings, the management fees, the souvenirs, the caferias, etc etc - these restaurants alone should generate 60M to 160M in operating income. Capitalize that at whatever multiple you like, subtract the minority interest, and you have the market cap covered. Pretty much.

    That's why my focus is not on this aspect of the business but on the items in which the company is investing. These items (a) are distrorting the consolidated GOP number; (b) have cause a 50M increase in admin expense; and (c) are drawing on free cash flow.

    So when (if?) these items either mature or end everyone will be able to see clean IFRS numbers and will give themselves permission to invest in these shares.

    That's how I see this story playing out. Time will tell how long it will take.


    ReplyDelete
  56. Macau November GGR allegedly up by 17% year on year, driven by VIP traffic

    ReplyDelete
  57. Liquidity for Keck Seng has really evaporated. Seems like hedge funds got impatient and sold out again?

    And red, maybe you can figure this out, but does the Hong Kong listed Keck Seng own the recently opened Four Points in Singapore? I cannot find anything about this in both the HK listed and Malaysia listed Keck Seng annual reports.

    http://www.straitstimes.com/business/property/riverview-reopens-under-four-points-brand

    It does show up on the website
    http://www.keckseng.com/hospitality

    Is there also a privately owned Keck Seng entity? This seems to be a significant property.

    ReplyDelete
  58. My understanding is that there is a Keck Seng (Singapore)Pte Ltd ("The Keck Seng Group") which is the privately owned parent of, inter alia, Keck Seng Investments (ours) and of Keck Seng Berhad (Malaysia listed).

    Keck Seng (Singapore)Pte Ltd also owns Keck Seng Hotel Pte Ltd. The latter is privately owned, i.e. is not a public company. It is Keck Seng Hotel Pte Ltd that owns (a stake in) Four Points Singapore.

    http://www.keckseng.com/
    http://www.businesswire.com/news/home/20151118005430/en/Starwood-Hotels-Resorts-Debut-Points-Brand-Singapore

    ReplyDelete
  59. Hi red, have a look:
    https://beta.theglobeandmail.com/globe-investor/investment-ideas/casino-stocks-plummet-on-report-of-atm-limit-imposed-in-macau/article33269803/?ref=http://www.theglobeandmail.com&service=mobile

    Lior

    ReplyDelete
  60. Thanks
    http://www.ggrasia.com/no-changes-to-atm-daily-limits-macau-govt/

    ReplyDelete
  61. Time for keck seng

    http://macaubusiness.com/housing-market-revives/

    Travelling to Cuba on holidays for one month. Internet connection in Cuba is very dificult, I´ll miss your comments and writes up.

    Happy new year in advance.

    ReplyDelete
  62. If you see a group of people sitting on the sidewalk it means you've stumbled upon a good wifi spot.

    Happy new Year

    ReplyDelete
  63. Now in the main square of the villages you have wifi for one or two dollars per hour. Great advance for the revolution!!

    ReplyDelete
  64. Thanks for the correction, good to know.
    L.

    ReplyDelete
  65. Hargreaves Services, London-listed, has finally got the ball out from under its feet. Uncomplicated path to 400p to 450p over the next year and half in my opinion.

    ReplyDelete
  66. The preview for the 2016 audited report is out:
    http://innovo.etnet.com.hk/common/corpan_cache/HKEX-EPS_20170216_002727396_0.PDF
    On the face of it, no surprises. Any thoughts on that?

    ReplyDelete
  67. He's still running those G&A costs 30 million above where they need to be which is interesting but nothing eslse strikes me as noteworthy

    ReplyDelete
  68. So the story is whether they can demolish their balance sheet through cash burning operations before a Macau turnaround and the development of the Hengqin food court? and as long as they can't, even if they just break even, as they have been in 2016, the investment's margin of safety remains intact?
    Man, you have balls of steel.

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  69. Speaking of the Future Bright food court: http://www.zhsswj.gov.cn/en/NewsCenter/News/201702/t20170206_16091376.html

    I guess the market is waiting to see: (1) how they will fund the 700m RMB to develop the food court (2) what they will do with the new logistics centre which should be finished in the coming months. I hope the logistics centre will help increase the margins.

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