Straco

Straco: CIMB initiates coverage with Add call and $.60 TP. The house notes that China’s government has been shifting its economic reliance away from exports and foreign trade to domestic consumption. This directly benefits the Chinese tourism industry. According to the World Travel & Tourism Council, tourism accounted for 9% of China’s GDP in 2012, and the tourism industry is expected to expand by more than 9% over the next 10 years, faster than the economy's growth rate. In 2010-2012, the number of domestic tourist arrivals expanded at a CAGR rate of 18.6% while per capita expenditure on domestic tourism grew by 13.3%. Expect this strong growth trend to continue as the demand for tourism rises with the nation's increasing 80% of Straco’s operating expenses comprise fixed costs, which means that the company can capture operational efficiencies through higher sales volumes. Expect Straco’s net margin to expand from 35.7% in 2012 to 47.2% in 2016 given the strong visitor arrivals across all its three attractions. Straco has the ability to generate very strong cashflows, as its business has little maintenance capex and working capital needs. The major capex is typically forked out upfront, whether for the development of a new tourism asset or the acquisition of an existing asset. Straco has not had any debt on its balance sheet since 2007. As at 3Q13, it has S$101.1m worth of cash and equivalents. This translates into net cash of S$0.12/share, or 26.7% of its current share price. Cash makes up 27.8% of the house $0.60 target price.