0703.HK - Future Bright Holdings

[Laxputs]

Management backs out Souvenir loss of -22.6 and "new restaurants and food court at Huafa at -22.5" on page 24 interim. So if we are trying to calculate profitability of core, we should be excluding both the new restaurants and food court counters, imo. There are other restaurants being ramped up, and that will take at least a year so I believe core profitability should be higher.

 

Another way to assess core profitability is SSS. It seems like it was trending towards 5500 rev/sqft or better in previous releases but H1 2015 is considerably lower. Based on their 297.3 H1 SSS from pg.22 and their previous footprint of 142,463 sqft (pg.28) in June 2014, it would suggest rev/sqft is 4173 annualized. But I'm not sure the 142,463 is what the SSS footprint is referencing. However, the footprint would be lower not higher so the rev/sqft should be at least that high.

 

Also, they went from 142k sqft June/14 to 277/k sqft June/15. We could approximate a MOS in earnings based on 4000 rev/sqft and guessing whatever footprint is core. It's above 144k and perhaps below 277k.

 

In 2012 they had 130k sqft and did 122m NOOP.  That's 1.41$/share with an 8x multiple before assessing investment properties and the 140k sqft of other F&C.

 

[Guest chai]

My biggest concern is that we may not yet see the bottom of the GGR drop. GGR adjustment could very well be a structural re-alignment and therefore you would not see a cyclical rebound in near-medium term.

Also, what if the mass GRR/ # of visitors  starts to decline, given the negative wealth effect from the current market rout?

Given the high fixed cost nature of the restaurant business, we could start to see real operational losses. 

[yadayada]

http://corpsv.etnet.com.hk/webservice/jsp/ETNET/CorpAn/eng/detail.jsp?VERSION=ENG&DOCCD=83724

 

What the hell is this? You gotta send papers to some hong kong office to get the dividend?

[constala]

http://corpsv.etnet.com.hk/webservice/jsp/ETNET/CorpAn/eng/detail.jsp?VERSION=ENG&DOCCD=83724

 

What the hell is this? You gotta send papers to some hong kong office to get the dividend?

Yadayada, I had a similar language on a recent series of dividends( interim, final, exceptional, shares distributions free of charge) from 201:HK and it went through just fine, there was no need to act....

[Laxputs]

http://www.gamingtoday.com/articles/article/55497-Macau_gambling_revenue_slide_continues#.VecnYpdRKVL

[investor-man]

http://www.bloomberg.com/news/articles/2015-10-02/wynn-leads-casinos-rise-as-china-signals-new-support-for-macau

 

Also noticed today that the Macau government rented out a section of Grand Central Station this week to spread tourist information about Macau. There were several booths setup discussing various tourist spots there and they were giving away some pretty high quality guide books. -- Good to know they are doing something to increase tourism.

[physdude]

Any views on the latest quarterly report? The 3Q loss was very small so looks like that they are close to breakeven now.

[60North Investments]

Not bad I would say. Same-store sales were -1.4% without industrial catering and +1.4% with industrial catering included, so things aren't falling off the cliff in the core food&catering businesses, as the share price would make one think. Think this will look very different with clean FY2016 numbers, assuming they don't take up any huge new projects like Huafa. And even though it burned cash and didn't work, they exited quickly and without damages that'd make a huge difference if you look past one year.

 

Next year, when Huafa losses aren't showing in the P&L and assuming the food souvenirs business doesn't bleed outrageously (some good actions taken there as well, for example moving to smaller kiosks from stores) and core business continues as is, they'll show a nice result especially for this price. Plus, there's lots of cash, properties net of debt, Hengqin land and other smaller things that are worth double the current price. But the market seems very focused on the headline results now which don't look that great when you have the Huafa losses and the food souvenir issues too.

[physdude]

For anyone following this, does anyone have any clue as to why the volume has essentially dropped to zero (even my piddling position is many times today's volume for eg.)? I can understand the sellers not wanting to let go at this absurd price but there don't seem to be any buyers as well (it is a full size position for me already).

[Golden Geezer]

Following the release of their 2015 results, FBH's stock price is currently rerating. Their market cap at the moment is equivalent to the value of the office in Hong Kong and the building in Macau that they own. Assuming Macau sentiment stabilizes then I could see FBH's share price doubling from here if:

 

1. They continue to focus on mass market (as announced in the FS, e.g. with 3 new restaurants in Hong Kong).

2. They find a partner for the Hengqin development (as hinted at in the FS), or delay the building.

3. The initial investment in getting the new food souvenir business off the ground reduces and they finally break even. They have clearly revised their strategy by opening smaller shops/kiosks. This gives them more flexibility to adjust their sales strategy.

 

The results in the last 18 months have been impacted by the general Macau sentiment (especially the expensive Japanese restaurants in the casinos), heavy investments in the food souvenir business and some mistakes (mainly the 19 food courts in Huafa mall – now closed), but they have amended their strategy to focus on mass market. Their valuation looks very cheap when stripping out these non-recurring expenses.

 

[Laxputs]

Good post. I hold a large position that is underwater. It's a position I will likely just hold for a few years until it drastically re-rates.

[heisenberg]

One can wonder if it is timely to open 3 restaurants in HK...there are now more restaurants closing than opening in HK for the first time in a while. Commercial rents are among the highest in the world and Chinese tourists ( = the mass market ) are shifting their holidays habits toward Japan ( cheaper JPY makes shopping more interesting there )

 

They would be better off opening restaurants in Niseko

 

I'm not impressed by the management to say the least : they make many mistakes and don't have any plan to reward the shareholders through buy backs. Empire builders they are.

 

So I don't see any rerating while they are in place and if the market cap is equivalent to the value of their building why don't they offload them quickly at 10% discount then buy-back shares ?

 

[60North Investments]

I'm not impressed by the management to say the least : they make many mistakes and don't have any plan to reward the shareholders through buy backs. Empire builders they are.

 

So I don't see any rerating while they are in place and if the market cap is equivalent to the value of their building why don't they offload them quickly at 10% discount then buy-back shares ?

 

Problem with buybacks is that if they bought back more than a few %, CEO CCM would have to make an offer to buy the whole company (I think there was a 2% threshold, if breached -> CCM has to make an buyout offer). According to them, that's not something they want to do. And if it was, I'd imagine they would have already bought the company.

 

I agree with the new openings though in the sense that it might be better to focus on existing operations first, for example by nailing the partnering of Hengqin. They obviously know the restaurant landscape better than I do, so I sure hope they see the new openings as great opportunities. Still, there's a lot more room for this to run if it starts trading on the fundamentals some time again.

[heisenberg]

if not buy backs, i'm sure shareholders would settle for a dividend of 90% of the stock price ( dividends are tax free in HK ) and re-invest the proceed in buying the stock if they feel for it

 

:)

[ccplz]

Does anyone know what happened with the 3 restaurants and food court counters in Huafa mall, and what is being impaired for that business as well as the food souvenirs business?

 

There doesn't seem to be much color in the filings.

[ccplz]

I don't think their piece of land on Hengqin will turn out to be worth anywhere close to the ~300m HKD they paid for it...

[Golden Geezer]

This is rerating quickly, with some very large volumes, in expectation of decent H1 results in the new few weeks showing that they have finally turned the corner.

 

Macau's GGR is expected to finally show some growth in September after a slide of over 2 years.

[ccplz]

http://www.hkexnews.hk/listedco/listconews/sehk/2016/0811/LTN20160811875.pdf

[awindenberger]

Anyone on the board still invested in or considering investing in Future Bright? I came across a pitch for this elsewhere and after a bit a financials reading it looks interesting. Seems like the business might be ready to return to profitability in 2017.

[constala]

Yes I am a long term holder and I met with management. Valuation is unchallenging but both upside (runway not obvious, they have no moat and no focus only ok locations) and Margin of Safety (Yellow House/Henquin) have diminished.  The company made too many mistakes and acknowledges them, but is now paying the price of their uncontrolled/excessive ambitions and expansion plans (Food Souvenir, too many openings, Henqin..)  Beta wise Macau GGR are turning the corner and found bottom. This should help. 

[awindenberger]

Yes I am a long term holder and I met with management. Valuation is unchallenging but both upside (runway not obvious, they have no moat and no focus only ok locations) and Margin of Safety (Yellow House/Henquin) have diminished.  The company made too many mistakes and acknowledges them, but is now paying the price of their uncontrolled/excessive ambitions and expansion plans (Food Souvenir, too many openings, Henqin..)  Beta wise Macau GGR are turning the corner and found bottom. This should help.

 

Thanks. Its good to hear that management knows and accepts that they've made a bunch of mistakes.

 

It seems to me that the completion of the Macau - HKG bridge is going to be a big boon to Macau. I remember when I visited a couple years ago it was annoying and expensive to take the water taxi over from HKG. The bridge should allow more people to come visit.

 

Even given all the issues, is my initial view that the stock is worth conservatively at least 2-3x more in the ballpark of your valuation? Obviously the timing could take awhile, but I want to make sure I'm not missing anything massive.

[LightWhale]

Yes I am a long term holder and I met with management. Valuation is unchallenging but both upside (runway not obvious, they have no moat and no focus only ok locations) and Margin of Safety (Yellow House/Henquin) have diminished.  The company made too many mistakes and acknowledges them, but is now paying the price of their uncontrolled/excessive ambitions and expansion plans (Food Souvenir, too many openings, Henqin..)  Beta wise Macau GGR are turning the corner and found bottom. This should help.

 

 

constala, why do you see the margin of safety with regard to Yellow House and Henquin as diminished?

TIA.

[constala]

Margin of safety indeed quite reduced: tangible real estate assets were about 1.10per share but both should be heavily discounted now. (firesale likely if cash crunch).

Yellow House is without tenant since Sep 16 (early breakage-tenant was supposed to stay until end Jan 18).  This was an annual income of @28m supporting the Value of HKD 500m/550m.=@0.72per share

Hengqin Land: still valued close to acquisition cost at HKD 267m=@0.38 per share: still no development partner, and worse, they were under investigation by the local authority for idle land with possible penalties of 20% acquisition costs per year. This was resolved in May in their favour, but the development partner, and financing of the project,  is still to be found.

 

[LightWhale]

Thanks. Each on its own is minor, but both together suggest something about management.  They keeps closing and opening restaurants, and it feels like the equivalent of overtrading - every change creates a drag on returns and adds to FB's sunk costs. Any insight as to why they're doing it? Any guess as to why they haven't partnered with anyone yet over the Hengqin construction work?

 

On the plus side, the bridge should be opened by December. And the casinos are up 250% from the bottom, so it seems timely to roll on the gains into companies which are expected to benefit from the ripple effect.

 

 

 

[Golden Geezer]

It's clearly been a slow and painful turnaround, not helped by the structurally loss making food souvenir business as well as the failures of all the restaurants in the Huafa Mall. All in all the business is recovering but the problem is that the margins remain poor, and the question is whether this is temporary (due to opening new restaurants) or permanent (due to inflation in Macau). This is especially concerning when I hear of management considering expansion into Taiwan when they have no base or presence there that I am aware of, which will again increase costs significantly.

 

For me the crucial change to watch for will be the introduction of their new central kitchen and logistics center. The latest update said the center was nearly completed. This may help them to be more efficient for the food preparation and to finally increase their margins. The other question being whether this will enable them to win some industrial catering contracts (see http://quinzedix.blogspot.hk/2014/07/future-bright-part-2.html for a little more about the opportunity) which would be a big bonus. 

 

The investment in the development of the Jia Jing food court in Hengqin (http://www.zhsswj.gov.cn/en/NewsCenter/News/201702/t20170206_16091376.html) may also delay the payment of a dividend for some time (even if they find a co-investor), which reduces the likelihood of a rerating.