Straco Corporation Limited (SGX: S85), or Straco, is a tourism asset operator that owns aquariums in China (one in Shanghai, the other in Xiamen), Lixing Cable Car and Chao Yuan Ge (both located in Xi’An, China), as well as 90% of the Singapore Flyer, a giant observation wheel located in the Marina Bay area of Singapore.
Investors might be wondering if Straco has a strong competitive moat. A moat is a company’s competitive edge that helps it fend off competitors and generate high returns on its capital. Here are several indicators I use to assess if Straco may have a durable economic moat.
Unique assets with superior locations
Straco owns tourism assets that are unique in nature and also situated in strategic locations. Shanghai Ocean Aquarium (SOA) is located at the heart of Shanghai and is easily accessible for both tourists and locals. Underwater World Xiamen (UWX) is located in Gulangyu (in Xiamen), which has been designated as a UNESCO Heritage Site, thus elevating its status as a must-visit location for tourists.
The Singapore Flyer’s location in the southern part of Singapore, flanked by the iconic Marina Bay Sands and Gardens By The Bay, makes it tough to miss. These three key assets of Straco are almost impossible to replicate and therefore provide the group with a unique advantage.
Return on equity
Return on equity (ROE) measures the profit per dollar of capital invested in the business and is a useful metric to assess a business’s profitability. Straco’s ROE for Q1 2019 stood at 2.9%, and annualising this, I get a ROE of 11.6%, which is respectable for a business that deploys a high level of fixed assets.
Operating and net margins
The operating and net margins also provide an indication of the strength of the group’s competitive moat. Straco’s operating and net margins for Q1 2019 were 52.3% and 34.6%, respectively, significantly higher than most businesses. These two numbers alone demonstrate that Straco has a solid competitive edge that allows it to enjoy superior margins.
The Foolish conclusion
Based on the above, it looks like Straco does indeed have a strong competitive moat thanks to its unique assets and its stellar financial numbers. Investors should also review Straco’s catalysts and risks in addition to its moat in order to form a complete investment picture before they decide to purchase shares of the company.
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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. Motley Fool Singapore contributor Royston Yang owns shares in Straco Corporation Limited.