Excerpts from analyst's report

DBS Vickers analyst: Paul Yong, CFA

Straco Corporation (S$0.79, STCO SP)

According to the Discover China’s Emerging Middle Class survey released by ZenithOptimedia, China’s emerging urban middle-class population totalled 125m in 2012, and is expected to reach 356m by 2020, which provides robust growth prospects for its domestic tourism sector. We believe that prime beneficiaries to this secular trend would be tourism plays with a strong presence in iconic and well-connected destinations such as Beijing, Shanghai and Xi’an.

The theme park is expected to smash records on the official opening having already welcomed thousands of people during the trial runsThe theme park is expected to smash records on the official opening, having already welcomed thousands of people during the trial runs. Photo: XinhuaExpected to draw at least 10m visitors p.a., the launch of Disneyland in Shanghai this June could catalyse visitor growth at Straco’s Shanghai Ocean Aquarium, as we will likely see a spillover of Disneyland-bound tourists to surrounding attractions and cities. 

♦ Meanwhile, we continue to see weakness for Underwater World Xiamen, which has had a challenging year as local authorities imposed restrictions to limit the flow of visitors to Gu Lang Yu, as part of their efforts to secure a UNESCO World Heritage status for the site. However, interim measures undertaken by the Group to mitigate the lower visitor traffic (i.e. extension of operating hours) could provide some relief.

"Well poised for further acquisitions"
paulyong dbs"Straco’s earnings have grown at a CAGR of 19.8% over the last three years. Currently trading at 13x FY16F PE (based on consensus estimates), we think the Group’s current valuation is reasonable, especially if it can continue to deliver firm profit growth.

"Further, given the Group’s net cash position of c.7.2 Scts per share, coupled with its strong cash-generation capabilities, we believe that Straco is well poised to embark on further acquisitions to drive its future growth."

-- Paul Yong (photo)

♦ The Singapore Tourism Board (STB) projects 0-3% expansion in visitor arrivals, or between 15.2m to 15.7m arrivals for 2016. However, YTD (January to April 2016) tourist arrivals in Singapore, fuelled by a spike in visitors from key source markets China and Indonesia, have increased by about 14.1% y-o-y to 5.53m, which indicates firm growth momentum.

Ranked as the top landmark in Singapore by visitors (based on polled rankings on TripAdvisor), we believe that the Singapore Flyer should see good growth ahead as it is well positioned to feed off the higher tourist numbers.

♦ Risks include:

(1) Straco has pledged that it will not be adjusting ticket prices for its attractions in 2016, and its ability to revise prices in 2017 and beyond will be subject to approval from the Price Administration Bureau,

(2) Potential competition from the upcoming fifth generation world-class Shanghai Haichang Polar Ocean Park that spans over 190,000 sqm which is scheduled to open in 2017, and

(3) Terrorism remains a threat to tourism plays – including Straco’s attractions, given the ramifications it can have on traveller sentiment and tourist arrivals.

Full report here.

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