Highlights from the Second Quarter Earnings of Straco Corporation Ltd

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Straco Corporation Ltd (SGX: S85), a developer and operator of tourism-related attractions in China, released its second quarter earnings yesterday.

The company’s main attractions currently consist of two aquariums, the Shanghai Ocean Aquarium and Underwater World Xiamen.

For the quarter ended 30 June 2014, Straco’s net profit increased by 7.4% year-on-year to S$8.3 million on the back of revenue growth of 20.1% to S$19.7 million. An increase in the number of visitors at both Shanghai Ocean Aquarium and Underwater World Xiamen had driven the increase in turnover. Combined visitor numbers to both attractions rose 22.4% over the previous year to 840,000.

For the first half of 2014, Straco’s revenue grew 24.0% to S$34.3 million but net profit increased by just 3.9% to $13.74 million. Earnings would be higher if not for a weakened Renminbi against the Singapore Dollar and the absence of a one-off gain on the disposal last year of certain Land Use Rights. If the foreign exchange losses and one-off gains were stripped off, Straco’s net profit would have increased around 38% year-on-year.

As of 30 June 2014, the firm had no borrowings and had a cash balance of close to S$100 million. This is a small step backward compared to the end of 2013 when the company had S$108 million in cash and zero debt.

Net cash flow from operations almost doubled to S$10.1 million for the second quarter compared to S$5.97 million a year ago. Capital expenditures were low at merely S$216,000, meaning to say Straco had generated free cash flow of S$9.9 million. The company will not be paying any dividends for the second quarter, which has been the case for a long time.

Straco’s Executive Chairman, Mr Wu Hsioh Kwang, commented on the company’s industry outlook:

“The Chinese domestic tourism industry remains buoyant as evidenced by the higher visitations at our two major attractions. Since the newly introduced China Tourism Law first took effect last October, we have been receiving a higher proportion of walk-in visitors to our attractions, resulting in a better yield. Our net asset value has increased 11.7% to 18.33 cents per share year on year.”

According to a recent CIMB analyst report on the firm, Straco’s growth may come from a potential hike in ticket prices next year as prices are typically reviewed once every three years with the last revision being done in 2011. Current ticket prices for Shanghai Ocean Aquairum are RMB 160 (around S$33) for adults and RMB 110 (around S$22) for children.

In the third quarter of last year, Straco paid a deposit of S$21.2 million for a distressed tourism asset located outside China. However, there’s been no further update on the asset since. If and when the attraction comes on board, it might provide a positive boost to Straco’s results.

Investors can also look forward to the third quarter. In each calendar year, Straco’s attractions would traditionally see a peak in visitor arrivals in that period due to the July and August summer holidays in China. For example, in the third quarter of 2013, more than 1.2 million tourists visited both attractions.

Shares of Straco closed at S$0.82 on Tuesday, translating to a historical PE ratio of close to 20. Its dividend yield stands at around 2%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P owns shares in Straco Corporation Limited.