Is Straco Corporation Limited Able To Continue Growing Unconditionally?

Straco Corporation Limited (SGX: S85) owns some very unique assets.

Its two underwater aquariums are located in tourism hotspot and has been able to continuing growing entry prices every three years. Both businesses are extremely cash generative. They have been key to building the company’s impressive cash balance of over S$100m 2013.

It is also because of the company’s strong balance sheet that it has been able to successfully bid for the Singapore Flyer, the failing gigantic Ferris wheel in Singapore.

With the new asset, investor can expect future earnings of the company to be much higher, if Straco is able to successfully turn around the business. There are already signs that the company is able to do this from the early results shown in 2014.

So, Straco has 2 businesses that is generating strong cash flow and has certain pricing power in this area. It also has one new asset that could produce strong cash flow. So, is the company set to grow unconditionally?

Nothing comes without risk

There is another company listed in Singapore that has very similar business to Straco as well. It is Haw Par Corporation (SGX: H02), with its Underwater World Singapore.

The asset was also a strong cash generator for the company for a long time. However, the story of Haw Par might also be a warning sign for Straco Corp.

Without any significant upgrade in the asset for a long time, Underwater World Singapore has become a dated attraction for visitors to Sentosa. And now with the new Southeast Asia Aquarium – one of the largest and most impression collection of marine life built right next door in the Intergrated Resort Sentosa by Genting Singapore Ltd (SGX: G13) – Underwater World Singapore seems to be just heading for a quiet death.

This is a key risk for Straco as well. As a small business in China, operating modestly-sized aquariums, there is a risk that another developer might come along and built a mega project and render Straco Corp’s asset obsolete.

The risk is here

Unfortunately, it seems the risk is now here.

In Shanghai, home to Straco’s most profitable assets – the Shanghai Ocean Aquarium – there are many new mega tourism projects coming on stream in coming few years. In particular, the Shanghai Disneyland and the Haichang Ocean Park, which are two huge projects, could pose a threat to the company.

Although the management commented that the new projects should benefit Straco as they will attract more visitors to the city, it might also become a threat to the company as all visitors only have limited time when on holiday. Additionally, with more  choices in the future, they might forgo some of the smaller attractions (like Straco’s SOA) and opt for the larger ones (Disneyland and Ocean Park).

We might not know what the direct impact of the future mega projects could have on Straco Corp’s current asset. But investors need to understand that the future of Straco Corp is not always without risk.

For more investing analyses and to keep up to date on the latest financial and stock market news, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest,better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Straco Corporation.