Straco: What happened to the Growth Story?

Among some of the worst-hit Singapore listed stocks due to the Novel Coronavirus outbreak, I reckon Straco Corporation Ltd is undisputedly one of them.

I have been reading ‘A Path to Forever Financial Freedom (3Fs)’ articles about Straco with interest. Yes, thank you Brian, for constantly bringing this stock to my attention.

This stock has been in my radar for years. I am sure, many would remember it as a rock-solid stock.

• Straco Corporation Ltd (read here)

From a quantitative perspective, Straco is a gem. Heartlandboy has wrote a great post about it on 15 December 2017 (see below).

• STRACO CORPORATION: INITIATION REPORT (read here)

It is to me, a cyclical stock, which I reckon, many a time, it holds me back. The thing about this company, it has many events happening from time to time. And the tourism-leisure sector which it is operating in is extremely volatile, ever-changing and heavily influenced by the economic outlook.

Back in 2016, I felt that the stock was undervalued. However, subsequently, its stock price continued its downward trend.

Nowadays I hardly see any analysts’ coverage on this stock. The latest analyst report I found was one dated 15 June 2016 by DBS Research (see below).

• Straco Corporation: Small MId Cap Explorations (read here)

What has happened since then?

Prior to the opening of the Shanghai Disneyland (in June 2016), there were doubts as to how much the Shanghai Ocean Aquarium will be impacted. Turns out that Shanghai Ocean Aquarium is able to benefit from the positive externality of Shanghai Disneyland.

However, subsequently, issues cropped up with the Singapore Flyer.

On 25 Jan 2018, operations were suspended due to a technical issue. All 61 passengers on board were brought to the ground safely when the incident occurred. Operations resumed two months later on 1 April 2018. This weighed on Straco Corp’s full-year earnings, which fell 12.4 per cent to S$41.8 million for FY2018.

Shortly after, the Flyer was again suspended on 19 Nov 2019 due to technical issue involving one of the spoke cables. And it has not opened yet.

However, it is not just the Singapore flyer that is not performing well.

In Aug 2019, Straco’s Executive Chairman, Mr Wu Hsioh Kwang said:
“Singapore Flyer reported higher visitor numbers this quarter compared to 2Q18, however, both the Shanghai and Xiamen aquariums registered lower visitor numbers.”

In Nov 2019, Straco in its 3Q Earnings highlighted the following: “Lower revenues contributed by Shanghai Ocean Aquarium (‘SOA”) as visitor numbers declined amidst a challenging economic and operating environment; while revenues from Underwater World Xiamen (“UWX”) and Singapore Flyer increased marginally.”

As a long term investor, it is hard for me to extrapolate the way forward for this company.

Now with the Novel Coronavirus outbreak, all Straco’s attractions are temporarily closed. In the case of Straco, this is without a doubt a ‘Black Swan” event.

Personally, to me, for the overall stock markets, I don’t really see the Novel Coronavirus pandemic as a ‘Black Swan” event (yet). There has been much worst crisis.

In 3F’s recent article titled, “Being At The Right Place At The Right Time” read here, Brian mentioned: ” With all attractions temporarily closed for now, I think it is safe to say that almost all the bad events have played out. The only thing I can think of is if this crisis were prolonged which means extension of the closure (third level) but hopefully we won’t come to that.”

Actually, I was thinking the only thing that is actually still lacking (to make matter worse), is a recession in the US or worldwide, and a sudden market crash in the US markets, in the next few months. Technically, that is not a remote possibility. Or the Iran-US war actually plays out (just trying to be creative here).

Nevertheless, things are really quite bad at Straco.

I was reading through Straco’s past earning reports and Annual reports. The thing that strikes me is, when it is bad, it is really bad, but when things turn around (eg. flyer get fixed and reopen), good again, it is really good (like the emotions of a teenage girl).

One quarter, the management was pleased to announce 20+ percentage increase in profit YoY, recovery of the Flyer and stated the steady growth in tourist arrival etc. Next quarter, management highlighted lower earnings from the aquariums. With no much details provided.

Are you kidding me? Seriously?

If you are someone who prefers to invest really stable and boring companies, this company probably isn’t the one for you.

What Now?

Ok, in the short to mid-term, I agree that the upside is pretty clear. That is playing the capital gain part. Nevertheless, if I am buying now, I probably have to be mentally prepared for further pain ahead (stock price drop). Like holding on to a falling knife or riding an angry bull. Well, just ask those people who bought the stock in mid-2016, holding it till now (and compared to those REIT investors who had a ball in 2019). However, fundamentally, the company is still alright.

“When stocks are attractive, you buy them. Sure, they can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30. You just don’t know when you can find the bottom.” Peter Lynch

The below figures are from Morningstar:

1. Price/Earnings: 11.51 (5 yr P/E at 15.53)
2. Price/Book: 1.69 (5 yrs P/B at 2.91)
3. Dividend Yield: 4.39% (5 yrs dividend yield at 2.84%)

If I think it was cheap in 2016, it is still cheap now (if not cheaper).

From a long-term income perspective, however, be prepared for fluctuations as the revenues are really heavily dependent on visitor numbers. And not forgetting that the US markets are still at an all-time high. The cyclical nature of its business is what I dislike.

Darn, at this time, I am probably telling myself I should just invest in Fu Yuan Shou or Singapore Saving Bonds. Suddenly, as compared to Straco (the once growth stock darling), these don’t look so bad.

“Most investors would be better off in an index fund.” Peter Lynch

However, I believe the overall growth story of Straco is intact and there is no fundamental issue with the company or industry as a whole. The Chinese tourism sector as a whole will grow supported by the burgeoning middle class.

Back in Sept 2016, in my post, I mentioned the following:

“Yes, it would perhaps be a good buy at this moment. However given the cyclical nature of this stock & US markets at all-time high, I would want to wait a little while for markets to become depressed to pick this up at a lower price.

Nevertheless, I will be keeping an eye on this stock in the meantime.

I am still in the “building up my war-chest” phase.”

Still on my watch list.

Well, I never ever did say stock investing is easy.

Some are especially excited about the fall in Straco’s share price (or the share prices of Genting or Mapletree NAC Trust or CapitaRetail China Trust or SATS or EC World, etc… the list goes on).

Currently, my approach to investing is kind of mundane.

I  have this monthly budget for investing (be it stocks or bonds — seem to be more towards stocks recently). It isn’t awfully lot, normally what is leftover from my monthly salary. Sometimes it is not even enough to purchase the min allowable lot for certain stocks. So yeah, well, it does in a way reduce some of the volatility (as compared to investing large sums) on a month to month basis, but it also guaranteed no sudden big rise. I don’t do leverage, my war chest is still much bigger than my stocks holding (but that stock percentage is rising slowly). Just slowly chipping at it.

The thing is above it all, the US markets are still at all times high. That is the constant never ever-changing story for me since 2016 — yeah it did drop by a double-digit percentage in late 2018. It is like this huge thunder cloud with no storm yet.

This method does not really set my adrenaline racing. It is far less interesting, more mundane. Occasionally, it becomes a drag… (kind of transactional), and there are times I have no ideas what to do.

Even if I have a sure idea (which I don’t), I won’t invest big at one go. Occasionally I may go over budget in some months… but try not to do that. There is always next month.

However, on the flip side, I spend less time worrying and more time with my family. (Eg. The more important stuff in my life). I have some dividend income from my stock & bond holdings, which would come in useful for the family spending (if not recycle back to my investing portfolio). I tend to view this method as slowly building up my dividend income.

Although I believe that reading and researching is important in investing. However, beyond a certain point, nobody can predict. I can do all the quantitative and qualitative analysis… but many things are just beyond my control. It is important to take action and also important not to do too many trades. And yes – there is NO perfect stock.

Recently what I have written is probably some of my ideas for next month (March 2020) or for what is left for Feb 2020 (probably a small sum). Maybe I will miss the boat… I don’t know. Who knows, maybe my idea for that same stock would change next month, or another stock might pop up in my mind.

What we thought is a black swan now could turn darker, who knows.

Anyway, I think this works for me at the moment.

Note: I am not vested in Straco.