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4 Risks of Straco Corporation that Investors Should be Aware of

Straco Corporation Limited (SGX: S85), or Straco for short, is an operator of tourism assets in both China and Singapore and owns two aquariums in China, Lixing Cable Car, Chao Yuan Ge (CYG), as well as 90% of the Singapore Flyer. My colleague has written on why Straco can be an excellent dividend stock. However, as with any investment, investors also need to assess the risks in order to come up with a comprehensive investment thesis.

So with that, here are four key risks to be aware of for Straco.

1. Downtime for attraction

During January last year, the iconic Singapore Flyer suffered a technical glitch which resulted in the attraction being shut down for repairs. The outage lasted around two-and-a-half months and resulted in the group reporting lower revenue for the Singapore Flyer for 2018 (at S$32 million) compared to 2017 (at S$41.2 million).

Though the problem was eventually resolved, the downtime resulted in lower profits and cash flows from the asset, and Straco is still in the process of trying to submit an insurance claim (the claim is being disputed by the insurer). Investors need to be mindful that such downtime could occur to any one of Straco’s assets and would result in a material decline in revenue and profits should the problem not be resolved in a timely fashion.

2. Terrorism threat

The threat of terrorism is always present and is a scourge which governments around the world find tough to eradicate. As Straco runs tourism-related assets, any terrorist attack would greatly impact demand for travel and holidays and would deal a significant blow to the group.

3. Exchange rate

Around 73% of Straco’s revenue and 92% of its segment profits are derived from China. The company, though, is listed in Singapore and reports its financials in Singapore dollars (SGD). Therefore, any weakening of the Renminbi (RMB) against the SGD would result in foreign exchange losses for the group.

4. Competition

Finally, Straco’s key asset – its Shanghai Ocean Aquarium (SOA) – is subject to competition from other tourism operators who are pursuing a piece of the very lucrative pie. With China seeing many more theme parks and amusement centres being built in the last few years, competition for tourist dollars has also increased significantly. The latest attractions to be built in Shanghai are Shanghai Disneyland (opened in 2016), developed by Walt Disney Co (NYSE: DIS) and Haichang Polar Ocean Aquarium (opened in 2018), which was developed by Haichang Ocean Park Holdings Ltd (HKG: 2255). Thus far, these two new attractions have not resulted in a significant decline in visitor numbers for SOA but competition remains a constant risk for Straco as China becomes more saturated with tourist attractions.

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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 Straco Corporation Limited and Walt Disney Co. Motley Fool Singapore contributor Royston Yang owns shares in Straco Corporation Limited.