0703.HK - Future Bright Holdings

[LightWhale]

Thanks for the links.  If business owners are incapable of profiting from core dining operations, they should probably not be relied on to succeed in real estate. Their growth efforts on both ends have so far destroyed value, even with current GGR tailwinds, and that's telling. 

What do you think is stopping them from scaling down the losing part of the operations, and from finding a developer for Hengqin?

You guys seem to understand the business quite well, I would love to get your insights on that. FB doesn't seem to have the funds or expertise to go solo.

 

On the other hand, valuation is compelling, and the rate of cash burn is minimal. 

 

[LightWhale]

June's GGR up 26%:

https://www.ggrasia.com/macau-casino-ggr-up-nearly-26pct-in-june-govt/

See also the attached article form Barron's.

 

I ran some regressions between GGR and FB's results during 2013-2016 [GGR and YoY change in GGR as explanatory variables, and as dependent variables, each of the following: FB's gross margin, operating margin, net profit and same store sales]. Adjusted-R was around 0.6 for each of them. So GGR is strongly correlated with the company's performance, and the change is evident quarter by quarter.

 

The Bridge should open soon, so land value can appreciate quickly. The central kitchen should be done, finally turning from a burden into asset.

 

It seems like good optionality - If results indeed turn positive with GGR, as the regressions predict, the stock should go up >25%. If results stay the same, price will most likely stay where it is. There seems to be very little risk. Now that I wrote that, the stock will probably halve  8)

5_Macau_Trends:_Will_June_Gaming_Revenue_Rise_30%?_-_Barrons.pdf

[Laxputs]

Management is always intent on expansion "The Group’s current business strategy remains to be to cautiously open new restaurants or food souvenir shops to generate more revenue with a focus more on mass market restaurants. Management is currently looking for opportunities for opening new restaurants and food court counters in Macau, and is cautiously expanding its mass market restaurants in both Hong Kong and Mainland China in the next two years. The Group is also exploring the viability of cautiously expanding its mass market restaurants into the Taiwan market."

 

So more Food Souvenir shops even while their results have been terrible. And expansion to another country when the results within their own border have been terrible. Meanwhile they are without renters of their rental properties and still committed to their large investment project in Hengqin. 

 

It's hard to have faith in management.

 

Thoughts?

[Genyi]

Some encouraging signs from Hengqin, where FB has its development property: http://www.scmp.com/news/china/economy/article/2111534/how-china-creating-its-answer-floridas-orlando-island-near-macau

[Golden Geezer]

Does anyone know why management has failed to lease the Yellow House - supposedly prime Macau real estate - for more than 13 months, since Forever 21 terminated the lease?

 

I am shocked that this appears to still be vacant and makes me question whether management are truly trying to turnaround the business or are looking for a cheap take private.

 

I'd be interested in other people's thoughts, especially as I saw some comments saying that they had spoken to management a few months ago. 

[Golden Geezer]

This stock seems to be finally rerating. Some catalysts:

 

1. (Potential) Sale of part or all of Hengqin as per the recent trading update.

2. A potential new tenant for Yellow House, which they are finally “actively searching” per the last two updates to the market (see my previous rant above).

3. The new logistics centre coming on in June. This may help control food preparation costs and also bids for canteen contracts (eg for casino workers, though I am not sure how likely this is).

4. Food Souvenir division finally nearing breakeven.

5. Completion of Macau-HK bridge and continuing good numbers for Macau GGR, which is reflected in the valuation of larger groups with Macau exposure but not reflected in FB’s valuation.

 

On the negative, the company seems to really struggle controlling costs, but good that numbers are improving.

[LightWhale]

H1 2018 report is out.

On the operational side, Sales and EBITDA are up (22% and 31%) but with no operating leverage the bottom line remains Net Loss.

 

On the property development side, management is finally showing some transparency.  Rather than looking for partners, they plan to sell 100% of Hengqin Land Project, within 12 months, and with net proceed exceeding book value. They even indicate the range, around 60% above book value, which results in about 672m. With that in cash, and the rest of the company trading at x0.5 BV (=250m), we should see 1.33 per share, which is indeed where the stock traded a few weeks back when a finalised sale was rumoured.

 

Of course, the negotiations could fail, but at some point they should find a buyer, so it seems to be more about IRR than ROI.

 

 

[serendibz]

H1 2018 report is out.

On the operational side, Sales and EBITDA are up (22% and 31%) but with no operating leverage the bottom line remains Net Loss.

 

On the property development side, management is finally showing some transparency.  Rather than looking for partners, they plan to sell 100% of Hengqin Land Project, within 12 months, and with net proceed exceeding book value. They even indicate the range, around 60% above book value, which results in about 672m. With that in cash, and the rest of the company trading at x0.5 BV (=250m), we should see 1.33 per share, which is indeed where the stock traded a few weeks back when a finalised sale was rumoured.

 

Of course, the negotiations could fail, but at some point they should find a buyer, so it seems to be more about IRR than ROI.

 

I can't seem to find in the interim results where it is mentioned the range of value they expect to get from the land sale. Can you kindly point out?

[LightWhale]

Comment 17. p.21 (copied below) - See the language they use below to draw a very clear parallel and with specifically invoked figures:

 

 

"The assets and liabilities attributable to the subsidiary, which is expected to be sold within twelve months, have been reclassified as assets/liabilities held for sale...net proceeds of disposal are expected to exceed the net carrying amount of the relevant assets and liabilities and accordingly, no impairment loss has been recognised...On 1 December 2017, the Group entered into a preliminary sale and purchase agreement to dispose of the leasehold land and building amounted to HK$32,429,000 which was classified as property, plant and equipment before the agreement was entered into. Such property was classified as held for sale as at 31 December 2017 and no impairment was made as the directors of the Company expected that the fair value (estimated based on the agreed price in the agreement) less costs to sell would be higher than the carrying amount. During the Period, the Group disposed of such property at a consideration of HK$52,000,000"

 

 

 

[serendibz]

Comment 17. p.21 (copied below) - See the language they use below to draw a very clear parallel and with specifically invoked figures:

 

 

"The assets and liabilities attributable to the subsidiary, which is expected to be sold within twelve months, have been reclassified as assets/liabilities held for sale...net proceeds of disposal are expected to exceed the net carrying amount of the relevant assets and liabilities and accordingly, no impairment loss has been recognised...On 1 December 2017, the Group entered into a preliminary sale and purchase agreement to dispose of the leasehold land and building amounted to HK$32,429,000 which was classified as property, plant and equipment before the agreement was entered into. Such property was classified as held for sale as at 31 December 2017 and no impairment was made as the directors of the Company expected that the fair value (estimated based on the agreed price in the agreement) less costs to sell would be higher than the carrying amount. During the Period, the Group disposed of such property at a consideration of HK$52,000,000"

 

The leasehold land was classified at cost less depreciation, hence there may be some gap between its book and market value. The Hengqin land was carried as investment property (market value) before being reclassified as assets for sale. I would not expect its sale value to be as high as 60% above carrying value.

[LightWhale]

 

The leasehold land was classified at cost less depreciation, hence there may be some gap between its book and market value. The Hengqin land was carried as investment property (market value) before being reclassified as assets for sale. I would not expect its sale value to be as high as 60% above carrying value.

 

Yes, cost - depreciation + leasehold improvements, that's a good point. Yet Hengqin value is discounted at ~12% on average (7%-16%), x3 the discount rate for the Yellow House. As the construction progresses, FB reduces those initial risks, thus increasing value merely through compliance with the initial estimates.

Which price do you expect?

[mrbrown82]

I don't think the footnote meant discount RATE of 7% -16% but a discount of 7-16% to comparables transaction. It is not to be confused at the 4% "reversionary yield" (discount rate) for the Yellow house.  I think at best we can see a final price of 20% higher than the latest net carrying value (which itself is subject to periodic remeasurement).

 

[LightWhale]

I don't think the footnote meant discount RATE of 7% -16% but a discount of 7-16% to comparables transaction

 

Thanks, a good correction.

Since fair value estimate is 3rd level (no proper comparable transactions exist), what do you base the ~20% premium on?

[Golden Geezer]

Has anyone been following the group recently? They clearly overextended themselves with their real estate ventures (Yellow House empty for over a year, development in Hengqin) and food souvenir business. 

 

The business park in Hengqin where the development is located was criticized by the Macau government over the summer: http://www.macaubusiness.com/macau-traditional-chinese-medicine-park-houses-25-local-companies/, so it may be difficult to sell it until the park has actually shown promise...

 

On the other hand, they have done well in Hong Kong, opening an 18,000 sq ft food court in the new high speed West Kowloon train station to China: https://www.scmp.com/news/hong-kong/hong-kong-economy/article/2167335/owner-hk35-million-food-court-west-kowloon-station

 

They've also won, per the 2017 FS, the food counters contracts for the K11 Musea project (https://www.k11musea.com/en/) opening this year in the center of Hong Kong. It's good that they seem to be winning contracts in large scale projects in Hong Kong, so must have built their profile in HK.

 

Still I'd like to see their share price reflect the potential, possibly after they have finally dealt with Hengqin and got the food souvenirs business to break even.

 

I'd be keen to hear the thoughts of anyone still following them.

[Genyi]

I invested in FB early 2015 and remain invested. It is the largest loss-maker in my portfolio, but I remain patient.

 

An unexpected disruption to the company's business started in 2014 with the Chinese government starting a campaign to fight corruption on all levels. Officials and business people, whether corrupt or not, don't want to be seen spending money in Macau. Visitor numbers to Macau dropped dramatically. FBs poor performance in the catering and food souvenir business were a result of this development. The lack of interest in the Hengqin development and Yellow House probably too. All these projects were started before 2014. In retrospect, very unfortunate, but I do not consider it as proof of FBs management incompetence.

 

If FBs sales would lag behind the visitor arrivals in Macau, that would worry me a lot more. However, both remain strongly correlated as pointed out earlier in this forum. Hence, I am waiting for the tourist arrivals to recover. Is it realistic to expect such visitor growth? I believe so, because of a few longer term trends:

 

• The Chinese government seems to maintain Macau's status as the gambling monopoly within greater China.
  
• Macau is being repositioned as a more wholesome and family-oriented offering, where gambling is only part of the overall experience.
  
• Most Chinese citizens have not visited Macau yet, while gambling is widely accepted within Chinese culture.
  
• Connectivity to and within Macau is being improved.
  

 

Next week is Chinese New Year, which is traditionally followed by a peak in casino visits. This means, we will soon get some indication about the appetite to visit Macau again. Gong Xi Fa Cai !

 

[investor-man]

I invested in FB early 2015 and remain invested. It is the largest loss-maker in my portfolio, but I remain patient.

 

An unexpected disruption to the company's business started in 2014 with the Chinese government starting a campaign to fight corruption on all levels. Officials and business people, whether corrupt or not, don't want to be seen spending money in Macau. Visitor numbers to Macau dropped dramatically. FBs poor performance in the catering and food souvenir business were a result of this development. The lack of interest in the Hengqin development and Yellow House probably too. All these projects were started before 2014. In retrospect, very unfortunate, but I do not consider it as proof of FBs management incompetence.

 

If FBs sales would lag behind the visitor arrivals in Macau, that would worry me a lot more. However, both remain strongly correlated as pointed out earlier in this forum. Hence, I am waiting for the tourist arrivals to recover. Is it realistic to expect such visitor growth? I believe so, because of a few longer term trends:

 

• The Chinese government seems to maintain Macau's status as the gambling monopoly within greater China.
  
• Macau is being repositioned as a more wholesome and family-oriented offering, where gambling is only part of the overall experience.
  
• Most Chinese citizens have not visited Macau yet, while gambling is widely accepted within Chinese culture.
  
• Connectivity to and within Macau is being improved.
  

 

Next week is Chinese New Year, which is traditionally followed by a peak in casino visits. This means, we will soon get some indication about the appetite to visit Macau again. Gong Xi Fa Cai !

 

Don't forget to add the opening of the Zhuhai Bridge to your list of potential catalysts. I've been holding a bit of this for a while as well.

[Laxputs]

I appreciated reading Genyi's thoughts. I've also held for several years, but am not sure what to think now given the results of the Souvenir stores, Henqqin, and the vacant rental property. Admittedly, I was being hand held by convincing analysis from The Red Corner Blog, but the radio silence from there adds to my insecurity on this one.

-Tom

[mrbrown82]

At current share price (at around 0.4x P/B), it seems like the market has priced in (a) continued vacancy of the Yellow House; (b) continued loss of food souveniers; © continued dismay performance of food and catering business; or, (d) a right issue which would be highly punitive and dilutive - but perhaps out of no choice, so that the Company has the funds to meet the remaining developmental obligation of Hengqin by 2021, shall the current sales plan does not materialise.

 

I am less concerned about (a) to © given the turn in general improvement in market -- especially if one is to take a medium term of over 2-years. As long as they are disciplined in their expansion -- a big if, I know, but I am hopeful they have learnt their lessons especially after Huafa, the business should finally stabilise.

 

The Hengqin appears to be the least predictable and most problematic as it is clearly an area where the Management has zero expertise and experience (and I am not sure why they never bother to at least hire someone with the relevant operational experience). Why would any informed buyer (lest an experienced developer that could bring this to closing line) pay anything remotely closer to fair market value as currently ascribed to its book - when (1) this seems a challenging site with multiple issues from the start; (2) there is a race against the completion timeline which is ticking every day; (3) a seller with weak position and not much other option?

 

Lastly, would be grateful if anyone who has access to the report below share some of its highlights:

https//www.smartkarma.com/insights/is-there-still-a-bright-future-for-futurebright

[Laxputs]

I'd enjoy reading those reports but an expensive paywall.

[Golden Geezer]

Hello - is anyone going to the AGM? I think it's tomorrow, it'd be interesting to hear if they have anything to say about their poor performance.

 

I note that they have yet to release their Q1 trading update, which they generally send out before 15 May, maybe they will send it out tonight before the AGM.

[Laxputs]

Any info on how the AGM went?

[Genyi]

https://asia.nikkei.com/Spotlight/Cover-Story/After-a-15-year-hot-streak-Macao-s-casino-owners-may-have-to-pay-up

 

A good article about the challenges that the Macau casino's are currently facing. The attempts to diversify tourism away from just gambling, seem to be failing. This is bad news for FB's souvenir stores, Hengqin, and Yellow House properties.

 

 

[Genyi]

Concerning Future Bright Holdings itself: the Q1 2019 results have been released. Unfortunately, not that good. The report also has an update on the Hengqin Island development project. The outlook here is not good either, but at least we are finally getting some details about what is going on.

 

http://innovo.etnet.com.hk/eng/ca_calendar.php

[60North Investments]

Based on FY18 numbers, with today's market cap of 305M and 650M or so EV, you get in the balance sheet 500M Yellow House property, 470M Hengqin project, 100M cash and 350M or so debts. Obviously they aren't likely shutting this down, but just a quick way to look at valuation. If Yellow House and Hengqin are worth together at least 500M then today's market cap would be "covered".

 

Still, the company doesn't seem to be able to make things happen and the comments on Hengqin weren't really encouraging either.

 

Anyone with more positive thoughts?

[investor-man]

https://asia.nikkei.com/Spotlight/Cover-Story/After-a-15-year-hot-streak-Macao-s-casino-owners-may-have-to-pay-up

 

A good article about the challenges that the Macau casino's are currently facing. The attempts to diversify tourism away from just gambling, seem to be failing. This is bad news for FB's souvenir stores, Hengqin, and Yellow House properties.

 

The article feels ill-timed given the Zhuhai Bridge hasn't even been open for a full year (it doesn't even mention the bridge). To me opening the bridge marks the beginning of Macao's transformation to a more "Las Vegas-style" destination. But... owning this company for the last 3'ish years has certainly made me appreciate Buffett's suggestion that "quality at a fair price" is the best option. Frustrating.