0703.HK - Future Bright Holdings

[yadayada]

it is trading at a 12x 2013 PE with a lot of growth ahead that they can fund for the most part with current cash on balance sheet.

 

But SG&A is up a bunch this year because of anticipated openings in H2 2014. So it is probably trading at sub 10x 2014 earnings when that kicks in. Which seems way too cheap.

 

I think the value here is in all the catalysts.

 

-new restaurant openings in 2014 (relatively low risk if they fail)

-Hengqin island working out

-new possible catering for hotels

-28 new restaurants if hotels and casino's open up in cotai strip between 2015 and 17

-increased traffic in current places as number of hotels is doubled and infrastructure improved (which could add up to be a lot with massive operating leverage)

-the central food processing centre being finished in about 1-2 years (improved margins)

 

So if all of the above works out, this could be a 10x in 5 years time. If only some of it works out, it is just a double in a few years. Which is not bad.

 

And if you look at statistics, VIP gambling is down this year so far, but foot traffic and mass market is up almost 10%. And it seems very likely that in 5 years Macau will only be bigger adn more popular. Looking at vegas in the financial crisis, gambling revenue only went down 13% on the strip. This does not seem to be a lot, and this was in a mature market with increasing competition. Macau looks to be far from mature. Probably pays to not just focus on the short term here like the market is doing.

[Laxputs]

This is one of the cheapest, high quality stocks I know of. I don't understand its price. Visitors to Macau and total spending is continually higher every year. Infrastructure spending is continually higher, the Chinese gov want to make it the tourism and leisure centre of the world. Future Bright is going to make more money every year. There are estimations that FB has only penetrated 5% of the market. They are consistently doing 20% Net Margins. They have a net-cash position. Turn to pages 58-61 of the interim report and they breakdown the total number of restaurants currently at 1h14 and the total expected by year end 2014. It is double. They are guiding to another 20-30 restaurants by 2019 and Hengqin is another high return project. I want to be investing in companies not only that are cheap, but that can reinvest at high ROIC. This is Future Bright.  There are just so many positive aspects looking at this company, I can list more if needed.

 

One method to value them:

 

Say they don't expand more than 2014 Year End total Retail Catering sq/ft numbers. Say it takes one year to ramp up those locations. So by FY 2015 results released in March 2016.

 

Sq/Ft: 288624

Rev/Sqft: 4800

Retail Catering Rev: 1386

20% Net Margin: 277

Shares: 694

12x FCF: 4.79

Plus Net Cash: 5.21

Plus Property Rental @ 12x: 5.48

Plus Ind Catering: 6$/share.

 

That's at XIRR of 73%.

 

So this quick valuation disregards: They are trying to land industrial catering revenue from the casinos. They haven't yet but have shown their capacity by servicing a university. One landed job may add ~20cents/share or 2/share at 10x value. That's not far off today's net cash price. This valuation also ignores organic growth--there are more tourists coming every year, FB will have scale advantages as they sell more food. It ignores growth from expansions--at 20% Net Margins, an investor wants them to reinvest in their business. And, this valuation disregards their Food Souvenir biz which is rapidly expanding, Wholesale biz, and the entire Hengqin project. Those are very important parts of their business that will be materially cash generative soon. This stock will be multiples higher in a short while. It's tied for my top holding, I added last night.

 

 

[investor-man]

I don't own any, but I think it's an interesting idea. What would you suggest I read to become comfortable investing in Hong Kong?

[Packer16]

It is interesting but the 12x multiples of rent and FCF don't appear cheap (with only 85% upside) as you can get HK hotel real estate for less than 3x EBITDA and not much debt for Shun Ho and Asia Standard.  CSI is also less than 3x EBITDA with very little debt. 

 

Packer

[Laxputs]

Thanks for the comments.

 

12x FCF is based on comps trading around 10x EBIT. Another way to determine future share price is to look at a 30% dividend payout ratio and assume a 4-5% div yield, as mgmt is committed to distributing 30% of normal operating earnings, as they are now.

 

And Hong Kong is not Macau.

 

FB is just unappreciated because they are ramping up the equivalent of 100% of last year's foot print. It will take at least a year for margins to be normalized. But over that time they are reinvesting with their cash flows at 20% Net Margins. It's growth on growth. The market may not credit FB with the high ROIC and coming growth of 2015 investments even if they eventually price it fair based on TTM. So this low-upside case of 73% IRR will get rolled over for another year given more growth coming. It's a company I imagine I'll own for 3 years barring anything unforeseen. Remember, the earnings from Industrial Catering, Souvenirs, and Hengqin are not to be brushed aside. They will be worth multiples of today's share price alone! No exaggeration. I just isolated retail catering (plus a small amount of property rental and their minimal Ind Cat) to show a part of its earnings. The Industrial Catering I calculated is not indicative of what they are trying to capture of that market. And you can see the investment and store roll out of the souvenir shops in that same interim report I mentioned.

 

While an investor holds receiving a growing dividend waiting for the market to give it an adequate price, intrinsic value is increasing due to high ROIC growth opportunities and industry tailwinds.  I'm sure the IRR is over a 100% if we add in Souvenir Shops, Wholesale, Hengqin, and Industrial Catering.

 

[Laxputs]

I don't own any, but I think it's an interesting idea. What would you suggest I read to become comfortable investing in Hong Kong?

 

Well, I don't think a person needs to be nervous investing in any country that doesn't have a history of appropriating stocks, or is in a state of war. And then it's just getting comfortable with the stock as you would every other time you research.

[investor-man]

It is interesting but the 12x multiples of rent and FCF don't appear cheap (with only 85% upside) as you can get HK hotel real estate for less than 3x EBITDA and not much debt for Shun Ho and Asia Standard.  CSI is also less than 3x EBITDA with very little debt. 

 

Packer

 

Shun Ho does look interesting. Am I reading this right? It looks like they've got nearly double their market cap in cash on their balance sheet right now? They also look to be in great financial shape with good top and bottom line growth. This is why I feel uncomfortable putting money into Hong Kong. This just feels like a scam, or at least is there some catch? I know Hong Kong is not the same as "China" but still - this is crazy. I'm new to the world of investing, so things like this feel too good to be true, and I'm not quite sure what to think.

[physdude]

Shun Ho does look interesting. Am I reading this right? It looks like they've got nearly double their market cap in cash on their balance sheet right now? They also look to be in great financial shape with good top and bottom line growth. This is why I feel uncomfortable putting money into Hong Kong. This just feels like a scam, or at least is there some catch? I know Hong Kong is not the same as "China" but still - this is crazy. I'm new to the world of investing, so things like this feel too good to be true, and I'm not quite sure what to think.

 

I only get a cash that is about half the market cap (http://www.aastocks.com/en/stock/CompanyFundamental.aspx?CFType=7&symbol=00253) but it still definitely looks cheap. The only problem is that they never seem to return any cash to their shareholders and just seem to hoard it  ::). I guess it is a great investment even with the near 100% run up in price over the last two years or so if you believe that you will eventually get to see the profits.

[investor-man]

I only get a cash that is about half the market cap (http://www.aastocks.com/en/stock/CompanyFundamental.aspx?CFType=7&symbol=00253) but it still definitely looks cheap. The only problem is that they never seem to return any cash to their shareholders and just seem to hoard it  ::). I guess it is a great investment even with the near 100% run up in price over the last two years or so if you believe that you will eventually get to see the profits.

 

It looks like that data you're looking at is a bit old. Check out their interim report (http://www.shunho.com.hk/shr/documents/ir/e%20253%20InterimReport2014%2020140925.pdf). They sold a building in Macau for HK$900 million. I'm sure they'll use it to buy more real estate in the future. There are a bunch of interconnected connected companies here which makes this a bit confusing to me, but it looks like it warrants more study. Perhaps rather than hijacking this thread, we should start another one for Shun Ho (Packer?).

[yadayada]

asia standard is interesting, but being a minority shareholder with shun ho stinks. They don't seem to pay out. Usually these hong kong stocks respond heavily to payout ratio's. If they don't pay out, they can trade at low multiples for years.

[Laxputs]

I would like someone to invalidate the thesis of how one doesn't make a 70%+ IRR in Future Bright. And I think it is a lot higher than 70%.  If my holdings in Enterprise Group and Macro Enterprises pop on the next two quarters' filings, as I expect they will, I'll be adding to FB at these levels.

 

 

[cobafdek]

I would like someone to invalidate the thesis of how one doesn't make a 70%+ IRR in Future Bright. And I think it is a lot higher than 70%.  If my holdings in Enterprise Group and Macro Enterprises pop on the next two quarters' filings, as I expect they will, I'll be adding to FB at these levels.

 

Sure, this might be a home run.  Who really knows?  The thesis may be sound, but it's not about the thesis.  I think Packer's point is that it's about the odds, and the odds stack up comparatively better for those other HK real estate companies.  Place your bets.

[Laxputs]

 

 

Sure, this might be a home run.  Who really knows?  The thesis may be sound, but it's not about the thesis.  I think Packer's point is that it's about the odds, and the odds stack up comparatively better for those other HK real estate companies.  Place your bets.

 

I'm actually not sure what you mean. I'm not trying to be rude. I would say investing long term is about the thesis. Do the homework, try to understand the company and the competitive dynamics and the market and the environment it will be in in a few years down the road, etc., and buy or don't buy. I think it's all about the thesis.

 

I actually don't think Packer invalidated the thesis at all, or at least I don't understand how he did. Hopefully he can elaborate. Saying one company is "cheaper", doesn't invalidate my thesis of 70%+ IRR.  To me it seems like a non-sequitur to say another company operating in a different jurisdiction with a different business is cheaper and thus FB is not a buy. I'm all for hearing about other cheap companies, but how does it make FB not a buy?

 

Have you studied FB then to say its odds are comparatively worse than others? Are you saying FB is a real-estate company? Are you saying FB's operations are based out of HK because that's where it is listed and so should be compared to HK real-estate companies?

 

Thanks for the reply.

[cobafdek]

I would say investing long term is about the thesis. Do the homework, try to understand the company and the competitive dynamics and the market and the environment it will be in in a few years down the road, etc., and buy or don't buy. I think it's all about the thesis.

 

I would say value-investing long-term is about the price.  I think it's all about the price you pay for your thesis.  The thesis needs to be impeccable to justify paying 12X FCF, assuming your figure is correct, and you'll be paying a high price for a cheery thesis if it's erroneous. 

 

I actually don't think Packer invalidated the thesis at all, or at least I don't understand how he did.

 

I'd be presumptuous to speak for Packer, since he is a superior investor with superior results comparatively.  But if I were posting what he had posted, I would have been primarily price-conscious, with no intent of trying to invalidate any thesis.

 

Have you studied FB then to say its odds are comparatively worse than others? Are you saying FB is a real-estate company? Are you saying FB's operations are based out of HK because that's where it is listed and so should be compared to HK real-estate companies?

 

I'd be the first to admit you and others know infinitely more about this company than I do, but my "research" stopped when I saw the numbers.  I may be missing a 10-bagger.  Your questions bring up valid theoretical concerns about what exactly are "comps," but using P/E comps, EV/EBIT comps, etc., though it has its drawbacks, is very Grahamite.  Your process appears to be different from mine, since I start with the value metrics,and don't go very far beyond, and almost never end up with a narrative/thesis.  Your process may work for you, such that I'll end up way off on this company, but it's only one company.

 

 

 

[Laxputs]

Price is a central part of the thesis or the 70%+ IRR is not there.

 

I'm not paying 12x FCF now. Perhaps I worded it awkwardly before. That is what I used as a selling price down the road in the analysis.  One could also use an exit price based on 30% dividend payout of sustainable earnings.

 

I just think the company is very cheap based on its footprint at the end of 2014 as laid out by management. The earnings power is obscured by the massive ramp up of the doubling of their footprint and it will be made very clear in a matter of months. Etc. etc. I just think it's basic math and a company with tailwinds in a unique spot to capitalize.

 

 

 

 

[Guest chai]

I noted the second largest shareholder of the company, Value Partners (one of Asia's largest hedge fund with c.10bn AUM so this is a really small investment for them) has been paring down its stake this quarter from 42m to 33m shares (c4.9% of total outstanding shares). What are people's view on this?

[Laxputs]

Personally, I think trying to infer fundamentals of a company or changes in fundamentals of a company or fundamentals of the competitive environment, etc., based on the selling habits of large hedge-funds isn't a great strategy. 

 

I'm just trying to understand why the company exists, what its position is in the F&B industry in Macau, where I think the company is going, what the environment will be like a few years down the road, etc., and if there is sufficient downside protection and enough IRR to get me interested. I like Future Bright on all of these aspects. A hedge fund selling its shares doesn't change anything. Someone is always selling for me to be able to acquire shares.

 

 

[Packer16]

The way I look at investments in a market like HK is I would like to pay less than 50 cents for todays earnings or assets.  PB may do outstanding, I don't know as it's price to be cheap is based upon in part on future growth, which I cannot predict with any certainty.  I prefer stocks who are cheap with no growth but that does not mean that my deep value approach will do better than a growth approach with FB.  For both Asia Standard and Shun Ho, I can say that the companies are significantly less than 50 cent dollars with no growth (even though they probably will grow).  I am not a growth investor and others who can glean what growth investors want out of stock have done well its not my game.

 

Packer

[60North Investments]

Q3 earnings are out, and as the Q2 report anticipated there were significant pressures on the margins. EBIT was 22.3% versus 38.7% the year before, seems to be largely due to ramping up new locations and food souvenir shops.

 

The quarterly reports don't give out that much information, for example nothing regarding balance sheet and cash flows. Macau still attracts people, even though less VIPs. Worries for me are that the growth rates in revenues haven't shown to be as large as could've hoped. If "all three restaurants and a food court" at Huafa Mall that they opened by mid-October mean the 122k sq.ft. that they were planning to open there I would assume next year we should start seeing very rapid revenue growth unless something's wrong? If they have now essentially doubled restaurant space from December 2013 it must show as a pretty decent growth after the initial ramp-up (3 months? 6 months? 1 year?).

 

With the franchising deals they signed earlier they mention in the report to open up in total +50 restaurants. I'm not exactly sure what to think of it though. They now have the doubling of sq.ft. with Huafa Mall, University of Macau and Macau Intl Airport, expanding the food souvenir business, Hengqin project and industrial catering expansion perhaps to casinos. Is it reasonable to expect that they can really do all of these properly, or is this seeming lack of focus going to shoot them back?

 

It seems that with the current 2.6HKD share price things need to go very badly. The Hengqin project alone, unless something goes very wrong, accounts for a majority of the current share price (assuming the space would be valued around 45-50kRMB per sq.mt., with a 50% discount to NAV and 694m shares, equaling 2-2.3HKD/share in value). And with for example last year's EBIT, 270m (this year so far 205m), you're buying the company with a market cap of 1800m (EV about the same unless they took hundreds of millions in new debt in Q3).

[Laxputs]

My thoughts align with yours. I think we need some time to see how ramp up does. Mgmt stated it's at least a year for ramp up of a restaurant.  Mid 2015 revenue should be very interesting.  Their growth plans are very aggressive. They've now stated well over 60 new restaurants planned for the next 5 years excluding Hengqin. In theory, given their historical margins of ~20%, it is a good thing. Plus there should me more density of customers going forward, some operational leverage working in their favour. But that would be a big project to pull off and needs to be executed well. The stock seems absurdly cheap even if they stop expanding by this year's end and true revenue starts rolling in.

[Laxputs]

Added more last night to Future Bright, going from 13% position to 20%. One of the safest and cheapest stocks I can find.  If they were to land a catering gig, they are trading at roughly 1x its earnings.  They are around 1-3x earnings right now ex-cash. At bare minimum, the stock is worth double. And multiples above the share price most likely within the next 3 years. Should be interesting.

[Guest chai]

Share price took a hammer today and is now almost 20% cheaper than few days ago, since Monday. Broke down HKD2 for first time since early 2013..

 

No unusual large trading volume .. though I did see recent news where Alan Ho, a newphew of local kingpin, who manages the Hotel Lisboa; and several of his liutenants were under arrest for suspected prostitution ring.

 

The founder CEO (who owns >40% stock) spent a majority of his career at Hotel Lisboa as part of the management; and should have overlapped with Alan Ho earlier in the 2000s..

 

Even if says the founder CEO is hit-by-the-bus proverbial or in worst case, implicated in any of the investigations/ cases in Macau (I did google search but couldnt find any), I would still think the business, at its current valuation, is way too cheap.. and, the operation in its current state probably can run-without his involvement..

[yadayada]

Doubled down on this one. 18.5% now. Add another 1.5% when some cash has settled a few days from now. Looks like one of the cheapest stocks out there now.

 

For 1250m$ you get 600m$ in net cash, 500m$ in prime real estate. And a recession proof solid cash flow stream for almost free, that will likely do 150-200m$ this year? Will be curious what earnings are without the 40m$ marketing expense. And you get any other growth from free basicly.

 

Even if CEO was somehow involved in shadiness, it is hard to lose here. And easy to see how this could be worth 4-5x the current market cap a few years from now.

 

Even without protection of underlying assets, your basically buying a growing business with a decent moat for 7-8x earnings.

[heisenberg]

i think my main issue with that stock is that their profit margin is going to get squeezed dramatically in 2015.

Let me explain :

On one side the wages are going up :

when walking in Macau you can see that restaurants are struggling to hire employees ( jobs ads on their door )

unemployment rate is now 1.7% and new casinos are expected to open soon building up the pressure on wages ( already trending 5-10% up )

On the other side, revenues are going down as F&B are highly correlated to the casinos GGR which are dropping 20-30% yoy

 

Scissor effect for the margins in 2015...

 

Cash on balance sheet = be suspicious in Asia if it builds up with no plan to return it to shareholders

Prime real estate = some pure listed properties play are trading at 50% nav so apply a safe discount on it

 

Happy to kick off a real discussion and be proven wrong

 

 

[yadayada]

Those are all non issues. Wages would have to skyrocket for it to be a problem. 10-20% increase in wages and the company would still do 90-100m$ in FCF.

 

And food and catering is more correlated with visitors to macau. There are some huge tailwinds there, and that number was up like 8 or 9% in 2014. Only thing that is down a lot is VIP gambling. And those are mostly a few very rich guys. Which matters to casino's, but not to the food business.

 

Hotel rooms are still close to fully booked through out the year, and the number of hotel rooms and casino's will be doubled over the next few years.

 

And cash on the balance sheet will all go to Heng qin project. It looks quite promising as there will be free internet, and the university of Macau is on that Island (FB actually does the catering). almost 50b$ US is invested in Hengqin at the moment, and it seems their 1 billion HKD project that most of the cash will go to there will probably be worth more in time. The plan is that Hengqin island will combine with Macau and both become a large tourist attraction. Since the CEO owns 45% and is in the middle of this,  I doubt he will waste a billion hkd on this if it were likely a dud.

 

Finally these guys show that they either have serious plans to invest the cash, or return it to shareholders. I think they returned like 30% to shareholders in the past.

 

I think to get what is going on here you have to look past the superficial numbers.

 

Finally their 500m$ piece of real estate is generating steady (and growing) rental income, which will likely returned to shareholders over time. Not like those other real estate companies that seem to not care about minority holders, or only hold it to speculate.

 

And management seems to shut down non profitable operations. They seem to care about shareholder value (probably because CEO is largest shareholder).