Thursday, April 2, 2015

Future Bright - 2014 Results and Outlook


(i) Other than Food & Catering
Let me first attempt to contextualize the discussion about the food and catering business by removing it altogether:

(ii) Food & Catering

A refresher: the food and catering business consists of a number of parts that, for the sake of clarity, I will categorize as follows
  • Restaurants, coffee shops, and food court counters located in casinos;
  • Restaurants, coffee shops and cafeterias in Macau but located outside casinos;
  • Restaurants and a food court outside Macau;
  • A food wholesale operation that imports and distributes Japanese ingredients throughout the Pearl River delta; and
  • A nascent food souvenir business that is oriented toward selling moon cakes, chocolate products and so on to Macau visitors.
In the casino-located footprint are a number of high margin restaurants -- five "Edo" branded outlets serving Japanese food and one "Shiki Hot Pot" branded outlet serving Chinese food -- that cater to the VIP trade and make Future Bright as profitable as any publicly traded restaurant business as you and I are likely to ever come across.

The cost of food, rent and labor -- 90% of its restaurant operating costs, in other words -- are variable. Punters who would pay 800 MOP for a meal at a high-end casino restaurant can tolerate high mark-ups on alcohol. There are no marketing expenses associated with the VIP (and most of its other) restaurants because they cater to captive traffic -- at the airport, the university, the hospital, the mall, and the casino. These factors, in my view, sum to high and stable margins.

I suppose that the notional bear case must be (and, as far as I can tell, is) that Future Bright is heavily dependent on the VIP trade, that VIP attendance in Macau is in terminal decline because of the anti-corruption and anti-money laundering crackdown in the PRC, and that the company's earnings power is therefore permanently impaired. And, in there somewhere must also be a theory about tremendous margin compression as VIP sales decline. 


I'm now going to try to unpack the results reported for 2014.

The second half of the year, the period in which Macau gross Gaming Revenue (GGR) collapsed, also saw the company open new food and catering outlets at the Macau International Airport, the J Plus Hotel in Hong Kong, the One Oasis Residential complex in Macau, and the University of Macau's New Campus.

The fourth quarter (mid October) also saw the launch of the company's operations in Huafa Mall on the PRC side of the border with Macau. 

I have knitted together the company's same store sales (SSS) and other information to derive an estimate of Huafa's sales for the period between Mid-October and the end of December:

If I assume that Huafa Mall rents are in line with retail rents in Zhuhai more generally, this follows:

So an approximately right representation of Future Bright's  2014 results looks, I think, something like this:

Coming back to the margin compression idea implicit in the notional bear case, if it is there I don't see it as clearly as I should:


Macau GGR and VIP GGR are headed toward 2011 levels from which they are expected to grow at a rate that matches the PRC's reported GDP. That's the plan that Macau and PRC seem to have agreed on. Most publicly listed Macau-related stock are priced for that scenario. The fourth quarter of 2014 was more or less comparable to 2011 and while YoY GGRs are still falling MoM comparables have stabilized. 

As I have said before this is a stock I think highly likely to double at least three times within the next four years. The best thing, I think now, is to make the case for each doubling separately and at the appropriate time. 

Here is a signpost justifying the first doubling: 

This assumes, obviously, that the food souvenir business, and the 126,000 sq ft of restaurant and food court space at Huafa Mall breaks even -- but no more than that. 

It assumes that the Hengqin real estate is worth no more than the price paid for it. And it assumes that the 70 additional restaurants that are contracted to come on line between 2015 and 2018 have no value. 

The immediate pathway to closing the gap to ~$3.50 seems to me to consist of three steps:

1) the cessation of dramatic YoY declines in GGR will likely turn Macau sentiment around. We appear to be three or so months away from that eventuality;

2)  the interim results in July/August ought to show a dramatically reduced bleed from the food souvenir business and Huafa operations; and

3) a sale of a part interest in the Hengqin property seems to me to be a course of action that is both sensible and one signaled in the Annual Report. 

It would make sense to me if such a sale occured before November. 
The risks at this stage are principally the company's exposure to any future sustained tension between Japan and China, on the one hand, and its reliance on Chan Chak Mo on the other.

Disclosure: I own some shares in Future Bright.


  1. Many thanks for the further detail on a really interesting idea! Just wondering what you mean by the reliance on Chan Chak Mo - I think you suggested in a comment on another post that his political leverage might have helped in the auction of the Hengqin project (though I might be misinterpreting), but surely by now he isn't that essential to the land assets having value, which is all that the MoS requires, and the restaurants in general seem to not be that hard to run. If the political clout is important for the whole operation, would you really want to own a company where rule of law/corruption could be a problem?

    Also a quick question on position sizing - I know you've averaged down, but at these prices is there any reason why it's not a bigger position (given the price drop has lowered its weighting in the portfolio)? Or is it a timing thing?

  2. Thanks for the update.

    There is some slowing down in the existing (excluding the newly opened) restaurant business. The slowdown is actually not that bad in comparison to the decrease in GGR numbers, yet the stock got sold off just like the other gaming companies. I do think the sell off is not without good reasons (and we will find out if those reasons are correct with time).

    My concern is that they are very aggressive investing in growth. These investments are in new areas. Have you considered the downside case where (i) these ventures do not pan out and (ii) instead of pulling out, the company stays in those areas for too long?


  3. Great work once again! I think both Margin of Safety and Upside need be discounted: I observe that (i) the FY results read like a big profit warning for 2015 and beyond, as they plan to grow aggresively; (ii) there are plenty of HK stocks valued with a 75% discount on prime tangible assets (think 184 Keck Seng, 201 Magnificent Hotels);(iii) they could well be planning a quick and dirty recap with friends-and it could be a fait accompli, you may not be able to participate-rather than a share buyback, if you read carefully their latest announcement.
    I think we could be heading towards lower market prices, and it would not be fully undeserved.

  4. Toby -- Chan Chak Mo is not essential to the land assets having value. He may not even be essential to the legacy food and catering operations having value although that's arguable.

    But I think opening 70 new restaurants, making the moon cakes work, getting casino catering off the ground etc needs someone energetic and competent as he has been thus far.

    And, in the case, of catering for casino staff I think his long relationship with SJM is the best bet for cracking the code.

    As far as I am concerned the political angle was relevant only in relation to the Hengqin auction.

    Position sizing: I had been hoping that Enterprise would report reasonable #s so that I could recycle some gains into FB.

  5. Q,

    "These investments are in new areas"

    You mean will Pepper Lunch etc work in Macau/Zhuhai? Yes, I've considered that.

  6. One small thing to consider, CCM has a hand in organizing annual food festivals in november, making sure his restaurants are at front row. Not sure how much of an impact that has though.

  7. Red, thx for the update. I have some problems understanding the report. Would be interested in your take on things.
    -Chan Chak Mo earns way more (14,016) than all other directors combined (2,948). Is this a sign of weak governance or normal in Macau?

    -unused tax losses of HK$78,420,000 (2013: HK$19,890,000)in Macau
    Why more tax losses, but tax paid?

    -Pledged bank deposits classified as non-current assets HK$202,709,000 (2013: HK$207,759,000) have been pledged to a bank to secure a bank loan amounted to HK$200,000,000 (2013: HK$200,000,000)(note 27). This secured bank loan bears interest at prime rate in Macau less 2.25% per annum.
    Loan is smaller than pledged bank deposit? Why does this make sense?

    How did you calculate the share based comp of 12?

  8. Hello Martin,

    "The emoluments of the Directors are decided by the remuneration
    committee, having regard to the Company’s operating results, individual performance and comparable market statistics"

    FB is Chan Chak Mo's vehicle. If it does well it is because he has done well. If his brother's Director Fees were as large I would raise an eyebrow but it is not.

    The tax loss accounts are split into separate parts -- by source of income and tax jurisdiction. There is a brief sketch of it in the AR. So Huafa losses for example and Food Souvenir losses may be treated separately.

    The pledged deposit < loan phenomenon is common enough in HK/Asia. It makes sense only to the extent that maybe both the bank and the company value the establishment and maintenance of a long term relationship with minimal risk attached.

    Share-based comp and deferred tax should be switched:
    deferred tax = 12
    share-based comp = 3

    I'll fix that in the graphic

  9. How did you come up with the 25k sq ft number for Huafa calculation? As per AR they opened 3 restaurants and food court at Huafa mall with significantly higher sq footage. Also the revenue number for Huafa mall is incorrect. On page 96 of the AR they split out revenue by geography. If we calculate the difference in revenue for china segment between 2013 and 2014, the number is closer to 18 million. So revenue from Huafa should be a lot lower.

  10. 122,617 sq ft open for 2 and 1/2 months = 25,545 sq ft.

    Geographic breakdowns of revenue sources are not always, in my experience, what they appear to be. The can sometimes be allocated by where the subsidiary credited with the revenue is incorporated. In any case,if the Huafa revenue is lower, as in your theory, the loss is larger.

  11. Even if I go by your calculation and annualize the gross operating loss for Huafa using the entire 122k sq footage we are looking at a 168 million loss for next year if they dont stop the bleeding. Between that and the souvenir business thats roughly 200 million loss, enough to wipe out bulk of next year's operating profits. While I agree that most likely they should be able to decrease those losses, that number is still too high for it to go from -200mil loss to 0 loss which is the assumption you have made.So there is a risk here that they have made a concentrated bet on Huafa mall which might go really bad, especially since we cannot verify the traffic footage in the mall. If the footage continues to be low then there is nothing FB can do to turn its Huafa business around.

    And all of this is in addition to the risk of Macau business seeing increased stress.

  12. Gotcha. Thx for reading and for the comment.

  13. So if Macau business feels a little more stress and the bleeding at Huafa continues, FB will start making operating losses and start dipping into their cash reserve and the margin of safety in terms of net asset value you are talking will no longer be there.

    So what I am saying is that you are underestimating the riskiness of the business since this business has no moat and wrong move on behalf of the management combined with some stress from the economy can wipe all returns. This is different from a business that has moat which is able to withstand few dumb management moves and bad economic cyles.

  14. Also wanted to add that I went to Macau in early Feb. I stopped by most of their main big restaurants and asked the waiters if they were seeing decline in sales and traffic. Most of them said no change from last year or a small decline in sales from last year. None of them said restaurants were seeing big drops anywhere close to the ones we are seeing in VIP segment. So it is in line with your Macau analysis. Unfortunately I didn't have China visa to check out Huafa mall.

    Disclosure: I am a investor in the stock. However, as I mentioned earlier I have kept the position size small since this business doesn't have a moat other than location and I haven't been able to get data on their Huafa location

  15. Some information on Zhuhai and huafa mall

    From what i can gather from different sources, it seems that mall is doing well.

  16. Thx for the supplementary comments.

    All restaurants and restaurant concepts bleed at the open. Branded "street" restaurants on the mainland break even at 4 months.

    The outlets at Huafa are not on the street (and don't have selling expenses) so the good news is that any uncertainty about the possibility of "continuing" losses at Huafa will be allayed or confirmed by the next report when they will have been open for 8.5 months.

  17. Red,

    Thanks for sharing your thoughts. Found your blog recently and it is a very good read indeed.

  18. Red, Can you explain how you came up with sales numbers for Huafa mall and where did you get SSS from?

  19. Anon #1: Thanks for reading

    Anon #2: SSS is in the AR, pp 28-29

    I've attached a picture here

    Est sales/sq ft by format are (1) annualized and (2) guesses based on format, location, and time since opening.

  20. Hey Red,

    Thanks for the writeup- I have been having a tough time modelling losses at Huafa and had a much less precise guess than yours.

    Not sure where best to post this question, but what revenue range are you predicting for the casino management business at Paradise Entertainment?

    It was nice to have a CC posted online, especially given the colour on non-recurring costs due to the Jockey Club and Waldo startups. Normalized margins look pretty great for this part of the business.

    I have been truly enjoying working my way through your numerous portfolios of ideas. Some are pretty straightforward, but the most fun ones are full of moving parts and still far beyond my capacity(and the sell side's apparently) for thoughtful analysis. No better way to learn though, and I look forward to struggling through many more.

    So thanks for the opportunity, and in advance for anything else you may offer in the future.

  21. Ha, well I could be dead wrong, of course -- despite the bluster :)

    I've uploaded my low-end estimates of the forward profitability for each of the Casino Services units here:

    Two big picture risks that I think you should think about re: Paradise (if you hadn't already):

    1) Why wouldn't the concessionaires (SJM, Melco etc) take back their satellites once they've turned profitable?

    2) Backdoor listing, patent sale by owner to the company, etc (vs grown up institutional investor from NYC, buybacks, etc._

    If you can get past these two Qs then I think it's a nice idea (although I think the projected #s for intl LMG sales are a lot of hot air).

  22. Thanks for the tips.

    I have considered both, and am comfortable enough with #2, primarily due to the buyback, dividend policy, insider ownership, and of course the foreign investor.

    As for #1, it is the reason I only have a small position in Paradise, at least for now. I can make arguments about the relative risk of franchise/operator models and the stability of dividends(and therefore valuations) at SJM etc by retaining their current satellite model-and also that Paradise clearly has some skill in marketing and provides equipment that makes satellite casinos quite profitable. A weaker argument is that the Paradise chairman appears to be well connected in Macau, and it would potentially be unpleasant to alienate him, whether due to reputational risk or economic incentives due to difficulty procuring more LMGs. I've also only been able to find one case of a satellite closure, which was apparently due to a personal dispute(I expect I have missed others). The rapid pace of expansion is also a consideration, and I would expect human capital to be somewhat scarce, and focused on major and more profitable projects in the near term at least.

    On the other hand, once the marketing campaign is done, the satellite is thriving, the expansion plans are completed, and the market adopts a risk-on approach to Macau valuations, the margin flowing to Paradise looks awfully tempting to me. I do not really understand what value Paradise continues to provide at that point besides LMG equipment.

    This risk seems quite evident in the pricing of the stock- and I have seen arguments that LMG recurring revenues are adequate to cover the current EV. I do agree that the international sales goals seem a bit questionable, given different gaming habits and minimum bid dynamics overseas.

    I would love to hear your take on the satellite model risk, and also where you perceive a price with an adequate margin of safety to exist(I am a fan of your definition of this concept, unlike many who rely on % discounts to a base case valuation). I have been considering modelling 3-4 years of casino management coupled with LMG maintenance fees through 2026-but do not like the short term view it forces one to take on Macau GGR.

    At this point, Future Bright just seems quite a bit easier to invest in.

  23. I think the key to the satellites is that they've failed because they've been catering to VIPs along with everyone else. VIPs, of course, would rather play in the Venetian rather than in some hole in the wall around the corner.

    They've been catering to VIPs because (1) the VIP trade is more profitable on a per table basis than grind mass and (2) because the table cap regulations mean that they can't make up for it on volume.

    So, Paradise's model works (a) because they've developed a core competence in grind mass (which is not as easy as it sounds) but also because(b) LMGs circumvent the table cap and make grind mass uniquely profitable.

    So,to a large extent, the Casino Services continued success is founded on the twin beliefs that (i) GOM won't relax the table cap rule and (ii) won't tighten it to include LMGs.

    The other thing is that JC is a protege of Stanley Ho.

    Re: the LMG segment being > than the company's enterprise value, the argument is as follows:

  24. Would it be right to assume that if LMGs lost their 100:1 table designation, Paradise would likely be only a cash box/potential donut? It is hard to imagine a lot of demand for their products in that scenario, at least locally. This has been my assumption so far, but it seems very unlikely to occur given the lack of profitability in the mass market plus nationalistic considerations.

    I will spend more time looking at their other products to see what a zero LMG/Casino Service situation looks like. I'm guessing not very pretty.

  25. Right: no LMG business --> donut

  26. Red why not focus your basket portfolio more? Seems that to focus on the top 6 or 8 would be a better idea?

    Or is that more of a personal and emotional thing where you enjoy analyzing them and having a small stake in them if you like one enough.

  27. Each has a different payoff timeline. So if one gets close to fair value I'll roll the proceeds into another one in the basket that is lagging. If it gets cut in half then I'll add to it.

    Rationale for the basket = (1) keeping my hand in the game. I get rusty & disoriented when I step away from the marketplace for a few months; and (2) some of these are illiquid.

    Also, Texhong & Keck Seng may enter the fair value zone in 2nd half of the year (Texhong = likely, Keck = maybe but probably not) so I've been looking for replacements. It's only when you own a stock that you truly know how you feel about it :)

  28. Dear Red,

    Regarding your portfolio management method "Each has a different payoff timeline. So if one gets close to fair value I'll roll the proceeds into another one in the basket that is lagging. If it gets cut in half then I'll add to it", I have a question on how to manage the risks. For example, if Stock A gets double and Stock B gets cut in half, you will sell A and buy more B. But what if there is a chance you underestimate A and overestimate B? What if B is in trouble and does not make it in the end after months/years. How will you manage this kind of risks and correct any possible errors? Thank you!

  29. Well I think the solution is to know what you own and what the drivers of its failure point are.

    For example:

    Emeco is an equipment rental company and its "orderly liquidation value" at the time of my investment was in the $0.60 range.

    As long as FCF was >$90 million a year from a combination of operations and asset sales, the stock was safe. The business model appeared to be set up for that purpose: diversification across a set of commodities, a "global capability" for disposing of assets, etc.

    The market was likely to extrapolate bad things from the fall in commodity prices, the hurried exit from Indonesia, etc So the share price may have fallen but the MOS would be essentially unchanged.


    The first sign that safety was compromised was when they said in a conference call 18 months ago that they were about to sell 2 x $50m packages of rental equipment to a customer. By the following conference call all reference to that asset disposal package had disappeared.

    The call after that saw an abandonment of asset disposals/FCF generation as the goal. In its stead was a "strategy" increasing utilization.

    At that point it was no longer safe: it was now just a levered bet on the direction of commodity prices.

    (When the 2 x 50 asset sale package disappeared I cut my position by 2/3. If it had gone through then the company would have been ahead of collapsing utilization rates in accordance with its stated business model.)

    Now it is even less safe than it was at the last call -- the strategy now is to use cash to buy another cyclical company and to hope for the best.

    Activist investors would now like something even more risky than that -- they'd like the company to merge with another highly levered company in the same business based on the proposition that $35m in assumed synergies and a supposed brake on margin erosion will save the stock.

    So, over the two years that I've owned it, Emeco has been: safe, somewhat safe, unsafe, and now so risky as to not qualify as an intelligent raffle ticket.

    The thing is to keep track of what's happening to MOS and size one's position accordingly.

    (And yes, I'll be out of Emeco at the first opportunity).

  30. Sorry if this is a dumb question, but any reason for the big price movement today?

  31. seems like you were in Emeco 2 years ago when it was much higher. You think the stock could go to zero? Im still in a 3% position or so, and I kinda wish I dumped it at 18c 6 months back.

    With what kind of scenario could you see this go lower? If they load it up with more debt to do some merger at a not so great price? The reason they are not selling a lot of assets is probably the huge discounts they would have to take on them?

    Seems relatively safe at this point with an activist and at such a large discount to NAV?

  32. Right, I first stepped into Emeco at $0.30 and, after all was said and done, by average cost basis was $0.22.


    It is trading at a severe discount to orderly liquidation value;


    It appears to have abandoned orderly liquidation as a central plank of its business model

    If it survives(by, for example using cash flows, to buy back the bonds at a discount) then itwill be a multibagger.

    But it will be a multibagger only if common sense prevails and they revert back to asset disposals at a pace ahead of the decline in utilization rates. I had thought two years that management need not be geniuses to grasp that point and I have thus far been proved wrong, unfortunately.

    Black Crane and First Samuel could move to elect a new Board to get things back on track. But this investment has now stretched to the end of my two-year limit and so I'm out.

  33. Alright makes sense, thanks.

  34. Red - good afternoon.

    I would be intrigued to know your line of thinking on NRCIB?

    I sense that some of the comment here prior to the FB bounce smells of the kind of fear one looks for.

  35. Hi,

    NRCI is a quality growth story: growth + operating leverage + growth investment financed by working capital (or "float").

    Tuck it away for 10 years and, likely as not, it will be earning $140MM on a recurring basis.

    The B shares are entitled to 1/2 the dividends of the company and the greater part of the majority owner (and CEO's) economic interest in the company will be via the B shares.

    He's 60 now and will be 70 in 2024. If he sells the company it would be reasonable for him to sell at cash plus 15x FCF attributable to the B shares (or higher).

    So ~$350/share sale price in 2024 and, say, $16/share NPV of dividends paid between now and then assuming 37.5% payout.

    The IRR on an investment at this price seems to me to be likely ~25% over a decade. There will probably be opportunities to buy on more attractive terms in the interim but it's not a bad place to start building a position.

    ps. You should know that there was a bit of a fuss about whether the terms of the recapitalization disadvantaged the B's in relation to the A shares. It never made any sense to me to think so (then or now) but, if considering this for an investment, I'd recommend you search around for it -- at VIC & Corner of Berkshire & Fairfax, but especially at Seeking Alpha.

  36. Is your expectation for separate bids for each share class? Have you seen any transactions for similarly controlled companies?

    If they go for the same price, the A shares are priced for about a 20% IRR using your 15x 2024 results($70 per share for A/B). This doesn't seem so bad given it avoids the apparent disadvantage of B shares under certain scenarios? I can however see the appeal of 30%+ IRR over 20% given the controlling shareholder and his motivations. It is interesting how mispriced both securities appear to be-but I suppose the sudden complexity has scared off the typical investor type it would attract?

    I guess it all comes down to handicapping the intelligence/alignment of the CEO when deciding between share classes.

  37. Well I think separate bids would be one way. If the Bs are entitles to $70m in dividends they will be in a position to get a market multiple for that dividend stream.

    There is more uncertainty surrounding the As, Small "tuck-in" acquisitions are okay but one can imagine that large acquisitions using the As as currency would be highly accretive to the Bs but dilutive to the As. (Low probability scenario this,but within the realm of reasonable possibility).

    So the As may or may not be mispriced but the Bs, I think, certainly are.

    There may have been exits from arbitrage fatigue.

  38. ps I don't remember having seen separate bids for classes of shares before but this recap was a bit unusual.

  39. Red - thanks very much for your detailed thinking on NRCIB.

    Yes, there was much constenation at the recap back in 2013 and the complexity must surely be providing something of a headwind for the market for both the A's and B's. I can't imagine that this was ever the intention. Tricky to undo.

    Repurchasing B's would be accretive to all if they can do this.

    The Heico discount on the A shares is also an interesting anomaly which I haven't been able to fathom.

  40. Heico is interesting for sure, esp in view of the pattern/distribution of buybacks

  41. Hey Red,

    Thanks for the update on Future Bright. Learning lots from reading your blog.

    I was wondering why FB thinks they can land contracts in the industrial catering business. To me it seems that unless there is a scarcity of capacity in a casino's kitchen, it would always make sense for the casino to feed its own employees...

    That is unless FB is that much more efficient that they can still charge a reasonable margin and provide food cheaper than the other kitchen's cost (who obviously would not charge margin, therefore the hitch).

  42. Hi,

    There are two constraints in Macau -- land and labour. They are expensive today and will be more expensive tomorrow. It seems reasonable to me that, under these conditions, one central kitchen operating at full capacity will reduce average cost by more than 15%.

    One can see this in the -- relative and before/after operating performance of the
    major HK-listed QSR chains, too, when they are supplying to their own dining rooms. Central kitchens --> lower average cost --> higher margins).

    There is also the practical question of whether the company would have invested HK$100MM in these if it had not already done its due diligence on the demand for this service from the casinos. Our man Chan hak Mo is quite well connected, is head of the official bodies relating to food and beverage, and already has business relationships with each concessionaire.

    I think it would be surprising if it turns out that the first time he asks them about whether they'd be interested in this is after the time and money has been already spent in getting the central kitchen & logistics center up and running.

    The future being what it is one never knows for sure but it seems tome reasonable to suppose that we'll see some industrial catering work in the future.

    What the margins will be, whether it will roll out concessionaire-by-concessionaire or casino-by-casino are thinks we'll have to wait and see.

    I think that these questions will become relevant and pressing at a share price above $6. Or, to put it another way, industrial catering is not necessary to support a share price of $6 or below.

  43. Regarding NRCI, doesn't the structure of the two share classes -- B shares get 6x the dividends of A shares, but they would be treated equally in any merger or sale -- present clear opportunities for manipulation by the CEO?

    An unscrupulous CEO who controlled the board and owned both A & B shares would (i) suspend (or substantially lower) dividends, driving up the value of the A's and driving down the value of the B's; (ii) allow the cash saved from not paying a dividend to accumulate on the balance sheet while he sells his non-voting A shares at inflated values; and then (iii) declare a massive dividend, driving back up the value of his B shares. (As a thought exercise, what would John Malone do with this structure? Is Hays any different than Malone? If so, why do you think so?)

    More generally, the relative value of the two share classes is determined by the actions of the CEO/controller, so it's very difficult to assign any value to either share class individually, even if you can value the enterprise.

    That being said, this does appear to be a great business, and the CEO doesn't seem like one to give up control. So, the B's likely will do well in the end. But if it comes time to sell, why can't the CEO simply sell his B shares (and thus control of the company) to whoever he wants and leave other B-class shareholders out in the cold?

  44. I suppose I'm having a hard time understanding how the hypothetical events in paragraph 2 impair rather than enhance the value of the Bs.

  45. The scenario in paragraph two was just one way in which the shares classes could be manipulated. Hays could also do the reverse: Declare significant dividends to drive down the value of A shares, scoop them up at low prices, and then agree to a merger or sale in which the A & B shares are treated equally. That would certainly impair the value of the B shares.

    Ultimately, I think you're right that the B shares likely will work out if your time horizon is long enough. But the structure of the recap raises many questions about Hays. He could just as easily have created a super-voting class with no extra dividend rights, but chose a different path that allowed him to profit at the expense of some class of shareholders by frontrunning the changes he decides to make in the company's capital allocation policies. Do you think someone who engages in that kind of conduct won't look for ways to screw minority shareholders when the time comes to sell the business?

  46. Fair point. Thanks for the insight.

  47. Red thoughts on this situation? It apears you can view OUTR's results 7 days prior to Q1 release:

    Looks to me judging on costs made in Q4, they will do roughly 100m$ in FCF in the first quarter alone. Seems like an information mismatch here, as the stock will probably pop on that info, as the market seems to still be quite pessimistic on that price increase, and the CEO leaving. And 3x FCF seems much too cheap? even if they waste some of it. Seems like a case of information assymetry?

  48. OUTR is a hedge fund hotel and that report is for external distribution. If I knew about it I imagine that they know about it. If they somehow don't and it's a surprise to them it will pop, as you say. More likely is that they do and the YOY figures are moderately disappointing to them.

    Either way, the best policy, as you know, is always to use IV as one's guide rather than how other people will behave.

  49. If the report is true, then that means they will beat on (yahoo analyst) estimates of 592? 535 + 80 + 20 is 637. If you assume costs of 380m$ for redbox (going by Q4 and adding 10m$), that is 155m$ in ebitda. That is 620m$ annualized. +120m$ for coinstar, - 30m$ for new ventures, and I get 710m$ in ebitda.

    Taxes + interest will be roughly 190m$ then? And total capex guidance is 100-120m$. That is 400m$ in free cash counting new ventures capex and losses (assuming they dont become bigger). That seems pretty cheap? 300m$ of that will be returned to shareholders.

    Add in a really good year for box office, and it might be even 50-100m$ higher.

  50. That's why it's a hedge fund hotel -- 25% payout yield is pretty good.

    A lot of well-informed institutions with access to management and the finest details of the business so it's worth being aware of one's place in the food chain, but it seems like good value.

    The game doesn't end with FY 2015, of course, so the important thing is to try to get a good grip on the scale of NV losses beyond this year.

    Do these things work in flyover country? or just in SF etc? How much will it cost to find out? etc.

    If the losses are dwarfed by the FCF from the core business,then the value is there.

    The positive is that the company is data driven to an unusual degree.

    The negative is that almost no management team is willing to accept that their core business is in runoff without acquiring/creating a replacement.

    If they stay committed to 75% payout/buyback then the remainder is the buffer that will sop up current NV losses and debt will finance whatever they acquire next at whatever multiple.

    So the buybacks could be "accretive" or it could all end up having been a tease. Time -- rather discussion -- will tell whether this was a no-brainer idea or a trap.

  51. alright thanks for giving your thoughts. It is a weird and fascinating stock to me.

  52. By the way, what are your thoughts on this, a stock is owned for a large part by hedge funds.
    Roughly 10-15% is traded, does it really impact the price much if hedgefunds are passively holding and not trading in and out?

    Since they are passive holders and not taking part in the market, it should not affect the price much if they adjust their fair value estimates? since the traded part of the sharecount is mostly exchanged between 'dumb' money (people who dont study these reports) and non fundamentals oriented traders?

    I guess not something to base your decision on, but still interesting food for thought.

  53. "if hedge funds are passive holders" became "since they are passive holders" in the next para.

    I wouldn't be comfortable making that assumption and the evidence is anyway that hedge funds ARE the dumb money.

    As I said previously, I'd just think about the IV range and maybe try to construct a favourable r/r relationship via options.


    ps This set up reminds me a bit of Awilco. Things could change in a dime so it's important to be careful.

  54. Hey red, did you read latest release by Enterprise? Like a slap in the face. It seems these guys are more corrupt then we thought.

  55. Yes, I think the evidence is now unequivocal.

  56. Probably best to wait for Q1, which will probably be somewhat better then Q4, and then sell right?

    Im not that hopefull going forward that things will improve much.

  57. The right thing for me is to get out starting now. I waited for Q4 and for confirmation about what Q4 was about -- that's enough.

  58. Red - Did you get a chance to look at FB's Q1 results. Quite shocking. Goes back to the earlier discussion that this is no moat business which is completely reliant on location of the stores and Huafa doesn't seem to be the best choice for location since they aren't generating enough sales/sq ft. This same question can be asked whether Henquin is prudent location or not. Also management continues to pore money in souvenir shops and opening new Huafa/Zhuhai restaurants even though they continue to loose money.

    Although, what surprised me the most was how much business they lost in Macau because of downturn. The Macau analysis you put together earlier no longer applies.

    There is still some margin of safety here but its fast eroding.

  59. Red - I am curious. How did you manage to nail this at 1.38 on Monday am - was that just a well pitched stink bid put in over the weekend in anticipation of the sell off?

  60. I had one buy order at 1.50 (and another at $1.00) and $1.38 is how it filled. The way this thing trades we'll probably see 30s again.

    My pet theory is that Huafa & souvenirs have, in the mind of the market become hopelessly confused with the core operations. It has constructed a narrative of what should happen to the casino restaurants and interprets the #s in that light.

    If that is so then there's some opportunity in volatility as the Q results appear.

    I had thought that sub $1 was possible after Q1 but it didn't happen.

  61. Have you done any research on the TPP? The more I hear from it, the more evil it seems, with the insane copyright protection and privacy breaches. But that could be misinformation too. So far it sounds pretty shady (with the whole non disclore behind closed doors, even within 4 years after signing it).

  62. Hi Red,
    Air Canada looks like a decent value. Do you think it has alot less upside than Flybe?

  63. Hi Red,

    Just want to check that you are still in this thing with me on FB. I just got a cash inflow and am thinking of increasing my position at these prices. Any thoughts on whether it's a good idea to buy low on FB or would you stay away?

  64. Have to admit, this is getting scary. Mass market is falling. Trillion dollar losses in Chinese stock market. I think we have to prepare for some more pain.

    Those casino investors must be shitting themselves with those new casino's in Macau.

  65. @1.35
    Depends on your costs basis and weighting. FB not falling like other stocks so worth looking at other names first -- XiabuXiabu, Tsui Wah, etc before deciding whether to add or not. There's also something to be said for buying some puts in other Macau names -- MPEL, LVS, WYNN, etc -- to take the edge off. I'm at >25% already in this name so as things stand today it would take prices below $1.10 to persuade me to buy more.

  66. Also worth noting that as time passes the more compelling Keck Seng becomes. I figure it reaches breaking point upon the announcement of its plans to dispose of its held for sale properties. (The North America properties and cash currently cover the market cap and all else is free). If announcement is mid 2016 then it goes to ~$14 and likely appreciates from there. So patiently building a position in Keck at these prices is not the worst idea in the world.

  67. Hypothetically, if you had 0% in any of the following 3, Keck Seng, FB, and Texhong (and you were forced to distribute all 100% among the three), what would your allocation be?

    I ask because these 3 are 3 companies that I've done work on in the past (and hence can get back into mentally). I believe FB is the largest opportunity out of the three because it is currently the most undervalued, and thus with the hypothetical above, I'd probably allocate the largest % to FB. Would you agree with my overall assessment?

  68. I'd say Keck 45, FB 35, Texhong 25. FB has the highest upside but I think there's time to roll Keck and Texhong gains into it as it plays out.

  69. Out of curiosity, do you work as an investment analyst or is this a passion of yours that you pursue outside of work? I've met a lot of investment analysts in my life and I'd say 95% of them don't come close to understanding how to break down and analyze a business like you do.

  70. The prices on FB aare getting increasingly more attractive. Any plans to increase your position at these prices?

  71. I wouldn't mind making FB a 50% position at these prices but there are a number of other names that have attractive/startling market valuations that I'd also be be happy to own.

    2 or 3 large positions in very cheap stocks are better than one enormous position in an exceptionally cheap stock so we'll see how price dispersion plays out in the HK market over the next few weeks.

    Plus, where's the bottom in FB? At cash? at 70% of cash? At 10% dividend yield? Hard to discern what the people who are selling people are thinking, if they are thinking about FB at all.

    E.g. Maybe they'd rather own the casinos on a "last to fall, first to recover" theory. If so , the casinos are trading at 11-13x EBITDA -- they can fall further and there may therefore be yet more seeling pressure in FB.

    Etc - you see how it goes. I'm clearly not an expert in bottom picking

  72. Are you still >95% sure the reported numbers for FB are correct?
    I did not understand why they took out debt despite their cash position and assumed one explanation would be the cash is not for real. If there is no fraud, I would invest immediately. As FB does not trade on reported fundamentals what is the bottom, indeed?
    Given the significant tunelling going on in this region at the cost of minority shareholders how to you get comfortable with a significant position?

    I read all I could get my hands on from this author on fraud in Asia:

  73. I am satisfied that there's a very low probability that the nubers are not fictional. Pledged cash + mortgage is not unusual in the HK market. You can verify whether this is so by checking the financials of a variety of property owning companies -- like, Haichang, for example, or Cheung Kong or any HK-listed stock that you feel certain is reputable.

    There is no evidence that I can see of any tunneling :the Yellow House property is not obscure and is periodically valued by both the real estate appraisor (paid by the company) and the lending bank (not paid by the company). The Hengqin property was bought at government auction and the auction price is a matter of public record and, 12 months ago, regional investors paid >$4 a share to help the company raise the funds to bid for it.

    You could trace the cash flows in and out of the company, look at whether HK is the nattural listing place for the company, evaluate Chan Chak Mo's position in Macau, ascertain whether the evolution of the financial statements matches what you believe the economics of the business should be. and come to one of three conclusions: safe, unsafe, don't know. That's the sort of judgment that, as you know, can't be outsourced and what I think about it shouldn't sway you one way or the other.

    For example, look at the food souvenir business: The master lease is held by Chan Chak Mo, the company pays him and he pays the landlord; there is ab annualized cash outflow of $50M from this segment, much of it for rent. So, is the mooncake segment there to line his pockets? The answer to that Q should feel easy. If it doesn't there is, imho, no harm in leaving this stock alone.

  74. It seems logical at these low rates to take a mortgage out on it no? Especially since they want to use the cash in Hengqin.

    One interesting note is that covenants of debt say that Chan Chak Mo needs to hold at least 37% equity of the company. What is your take on that red?


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