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Here Are 4 Things To Dislike About Straco Corporation Ltd As An Investor

Straco Corporation Ltd (SGX: S85) is a tourism asset owner and operator with business interests in China and Singapore.

In China, the company has the Shanghai Ocean Aquarium, Underwater World Xiamen, and Lintong Lixing Cable Car attractions under its umbrella. As for Singapore, Straco had bought a majority stake in the iconic Singapore Flyer – one of the largest observation wheels in the world – in late 2014.

As investors, it is important to consider both the pros and cons with a company. In this article, I will be looking at four troubling things about Straco’s business from an investor’s perspective. For a list of four things to like about the company’s fundamentals, check out here.

The first negative: A flat performance in 2016

Although Straco has a great long-term track record of growth (something I touched on in my aforementioned article about four things to like about the company), 2016 was not a year of growth for the company.

You can see this in the table below, which shows some of the important financials of Straco for the fourth quarters of both 2015 and 2016 and for the whole of both years.

Straco financial table 2016
Source: Straco 2016 full year earnings release

Part of Straco’s weaker performance in 2016 is due to the devaluation of the renminbi against the Singapore dollar. With the declines in revenue and profit seen in 2016, some investors may be wondering if Straco’s heady growth days are coming to an end.

The second negative: Business is highly affected by uncontrollable factors

Straco’s business can be highly affected by things that it has little or no control over. For example, given that Straco runs tourism assets, its business performance will be affected by tourists’ decisions on where to visit.

These decisions, in turn, are affected by so many factors that are beyond Straco’s control, including the economic performance of the tourists’ home countries, the availability of discretionary income on the part of tourists, currency fluctuations, the promotional efforts by the authorities of the countries where the company’s assets are located, and more.

The third negative: Costs may be on the rise

One positive aspect of Straco’s business model is the high level of fixed costs it has. This gives the company a significant amount of marginal income with every unit increase in revenue.

Yet, the above assumption is valid only if the company’s fixed costs remains relatively flat. Unfortunately, there are signs that this may not be the case, at least based on the company’s latest financial results. For instance, staff costs rose 21.4% in 2016 despite revenue declining by 2%.

The fourth negative: Tourists have increasingly more options

One of the arguments to support investing in Straco would be that its business can benefit from growth in the Chinese people’s discretionary income, which in turn can drive domestic tourism.

But, the options for Chinese consumers to spend their money on is also growing. For instance, The Walt Disney Company opened Shanghai Disneyland last year; this attraction could pull plenty of discretionary income away from Straco’s Shanghai Ocean Aquarium attraction, which is also located in Shanghai.

Having more options mean that tourist numbers (from both domestic and foreign groups) to Straco’s attractions may drop and the company could have difficulty raising the prices of its tickets in the future.

Shanghai Ocean Aquarium is holding its own so far (in 2016, the asset managed to grow its revenue). But, investors should still pay attention to any sign of decline in the company’s revenue in the near future.

A Foolish conclusion

In my view, there are four troubling things about Straco’s business, namely, a lack of growth in 2016, a business that is highly affected by forces beyond its control, a possible rise in costs, and an increase in competition for tourists’ dollars.

Yet, there are still things to like about Straco as an investor. I’ve shared the link earlier to the article I wrote about the pros with the company, but for convenience, here it is again.

By considering both the positive and negative aspects about Straco, investors would be able to make a more informed investment decision on the company.

If you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of The Walt Disney Company. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.