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0703.HK - Future Bright Holdings


yadayada
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Does catering, restaurants, food courts in Macau mostly i think. Also leases out a building, trades at less then 10x earnings (if I base it on their Q1, 12x 2013).

 

V high return on capital (they run like 24/7 because that fking city never sleeps), but the two most interesting things are capacity added in 2014 and 2015 (more then double their sqft) and the huge tailwinds Macau will see in the next few years. From the first you will see some margin expansion as well. And even with little sqft added revenue/sqft is growing, and now over 600$US / sqft.

 

Seems their moat is their locations, and owner/operator is legislator in Macau. As long as they don't fk it up, they will be fine. Also they seem disciplined in closing down places that give inadequate returns

 

Some reading material on that:

 

http://www.kimeng.com.hk/upload/research_reports/FutureBright_20121211_CV.pdf

http://www.ebscn.hk/upload/20130301/201303011362107131617.pdf

http://www.emperorcapital.com/filemanager/tc/content_66/2013-09-05.pdf

http://www.chinastock.com.hk/ewebeditor/uploadfile/20140305094057140.pdf

 

They have a decent record of paying out dividends, and it seems to me this thing can more then double within a few years. It basicly lifts on the gambling industry because a lot of their restaurants are in or next to the casino's. They have 2 restaurants in Macau airport, and do catering as well. And you get this pretty cheap imo.

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Future Bright got just yesterday (24 July) the approval of their land bid in Hengqin http://corpsv.etnet.com.hk/webservice/jsp/ETNET/CorpAn/eng/detail.jsp?VERSION=ENG&DOCCD=81183.

 

From the analyst posts yadayada posted above, China Galaxy International (the last one) estimated that Hengqin would add 5.70-5.90HKD into their valuation if approved. However, they estimated that the company would get 140k m2 of GFA, when the company now received 50k m2. Also, the price of the land is higher 4.2kRMB / m2 compared to what these guys estimated.

 

I tried to draw the picture quickly and came up with some numbers based on the China Galaxy Intl report. This deal they got, 4.2k RMB per m2 for the land, about 14kRMB per m2 for construction. If it's worth 45-50kRMB per m2 that'd make 2.2-2.5bRMB (2.7-3.1bHKD) in total value? If you discount that with 50% and divide by 694m shares you get to 2-2.3HKD per share.

 

Would be great if someone had thoughts on whether that's in the right ballpark or not!

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well  50k sqm is 536k sqft right? They will build food plaza's, restaurants etc there. If they get 3000 HKD/sqft (half of what they do now), with half the net profit margins (about 14%) then that would be about 220 million HK$ in net income, or about 2.7 bn hk$ in value. If you assume better margins, then it would be more then 3 bn$. So more then 4$ per share. I guess 3-4$ per share sounds about right.

 

I have my sights set on more nearby expansion in Macau though, and growth due to infrastructure projects. I thinkn it will be at least several years before hengqin is finished.

 

I guess since they target to invest 1 bn hk$, 2-3 bn hk$ of value over the next decade sounds about right for Hengqin. that is probably the target, but if they fail in execution it could be less. So yeah 2 hkd is probably the minimum unless they completely mess it up.

 

So they have about 450mm hk$ now on the balance sheet. I guess they will invest another 600 million in the next few years. That probably means they will pay out about 20-30% of their net income in dividends.

 

I think that if they open their new places in Macau, and more inflow of people due to improved infrastructure + some operating leverage they can do close to 500 million in net income within 2 years or so.

 

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Thanks for your thoughts yadayada! I thought about looking at the value that way as well but realized I don't really have an idea how much of that 536k sq.ft. will be restaurants and what portion will be other spaces. But like you said, it seems reasonable to think that with total investment of +1bnHKD they'll get to about 3bnHKD in value if things go according to plans. Management anticipated the Hengqin project's construction to take 3 to 4 years.

 

Please correct me if I'm wrong, but I think they're supposed to open about 160k sq.ft. of restaurant space this year (Huafa Hall being the largest part with 120k sq.ft.)? If this is the case, I wonder if you can simply expect that this doubling of restaurant space approximately doubles revenues within couple of years like you yadayada anticipate?

 

Any thoughts on what are the biggest factors/risks that could get this screwed over instead of being +7bnHKD (back-of-the-envelope: 2bnHKD Hengqin + 5bnHKD restaurants + 0.5bnHKD properties) in 2-3 years time?

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they have a building of 22k sqft in the middle of Macau, and they will rent it out for 25 million HKD next year (15 million past year, but leases ran out, and prices shot up in Macau). If you give a 50% discount (because it is not Macau centre but Hengqin), that would be 291 million HKD a year. Or with a 75% discount, 140 million a year. So I think 50% being added there in net income (100 million) is veyr conservative and somewhat of a worse case scenario.

 

So I think in 3-4 years, they could do between 350 million (very conservative, assumes Hengqin is a total failure, and doubling of sqft will not be as big of a succes in Macau) and 7-800 million hkd in net income a year (if Hengqin pays off). Currently they do over 200 million.

 

Just seems that even in a total bear scenario you cannot really lose on this one.

 

Also to give you an idea, Mcdonalds does like 1k$/sqft I think. They do about 600$/sqft in macau currently, but a lot of these places are open 24/7. So there might be some room to grow there. And if you look at their SG&A costs, they will not go up much. They are currently about 90 million HKD. So if they manage to go to 700$/sqft there is some operating leverage.

 

I also think that gross margins will go up, because some other costs like food distribution are centralized as well, and benefit from scale.

 

I think the biggest risk here is that when they get bigger management will lose some control over quality. And that might hurt revenue/sqft or cause more failures. Im not sure how big of a risk that is.

 

Another risk is that they do not pay out shareholders at least 30% of earnings like they stated. This will probably cause a low rating of the stock.

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btw to give some idea on infrastructure improvements.

 

There will be a 30 min train line between macau and Hong Kong airport within the next few years (this is huge, because Hong Kong airport is much bigger then macau airport). The number of hotel rooms in Macau will double between 2015-17 to about 60k.

 

There will be a train line through macau improving ease of travelling. There will be better connections to mainland China. And border control will be a lot more efficient allowing  through almost twice as many people in the same time.

 

Also penetration of mainland china people visiting Macau is like 1.5% vs 10% for Las Vegas. And length of stay is less then half that of Hong Kong and Las Vegas. To improve this they will build a lot of entertainment facilities on Hengqin island. I think they already finished a large water park in 2013.

 

Add in probably more disposable income for Chinese people over the next decade, and it would be hard to be bearish on Macau at all.

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The board (“Board”) of directors of the Company wishes to inform the shareholders of

the Company and potential investors that based on its unaudited management information

currently available, the Group will record a remarkable increase in profit for the six months

ended 30 June 2014 (“Period”) as compared to that for the six months ended 30 June 2013.

 

 

 

http://corpsv.etnet.com.hk/webservice/jsp/ETNET/CorpAn/eng/detail.jsp?VERSION=ENG&DOCCD=81269

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Gross operating profit up 29% in the first half sounds good, but the share count has increased by 10% too. At this rate I estimate they are on course to earn HK$200m attr. to equity holders excluding the 'property gains', so not hugely cheap with a market cap of $2.8bn.

 

Doubling square foot will obviously increase earnings a lot, but how much new equity will they raise to pay for it? I'm a bit confused why they pay a dividend when they are constantly issuing equity for growth.

 

I also worry a bit about Macau, obviously booming at the moment, but it will probably suffer disproportionately in a crisis.

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I think they will do 250-300 in net profit this year. And that is conservative. You have to understand their business. It is very high return on capital, and a pretty good competitive advantage.

 

the only large upfront cost will be Hengqin. The other ones do not require very large up front costs as they lease. And since this is a very high return on capital business they get a lot of FCF as they grow.

 

The share issuance was for the Hengqin project mostly. That will be very accretive in a few years if they can lease it out. By my calculations they do not really need to sell additional shares for that.

 

As for a crisis, that is not a large risk. On the short term it is. But I don't think China will collapse in the long term. It will just be a hiccup, and an annoyance because now you have to wait longer. Or a opportunnity to add if the stock crashes :).

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yeah and also excluding 25m rent they get I think. They did 180 last year I think. And judging by gross income and some operating leverage, I think they are on track to do at least 250 this year if they do not grow. But they have not yet opened the bulk of their new places. And also if they open these new places, they operate in prime locations with a lot of foot traffic. Or they do personel catering for some hotel or casino that is running. So it ramps up somewhat quickly. Not comparable to some restaurant in a small town trying to compete with 6 similar restaurants nearby.

 

And there are huge tail winds coming for Macau.

 

You gotta see it like this I think. They currently have like 140k sqft . This will be expanded to about 390 by 2017. They currently do about 6k/sqft with 35% gross margins. So if you assume foot traffic does not really increase, and their new places are only a moderate success at 4k/sqft and a 30% gross margin, then that will add over 300 million. Maybe add 70 million in SG&A expenses on top, I get +200 million in NPAT, or about 380m total NPAT. as 12x multiple on that is 62% upside.

 

BUT this assumes that new stores are not very succesfull, this assumes that current foot traffic does not increase, and this assumes that Hengqin will not really add anything. so this seems like a pessimistic base case to me.

 

If you look at Hengqin, that will be 80% let 20% operate. they get 1100hkd/sqft for their current Macau building. If they would only get 400/sqft then that is 171 million hkd. and a conservative 120mill for operating the other 20%.

 

If they actually improve revenue/sqft in Macau, then I get like 600 million excluding Hengqin by 2017. Hengqin will cost a billion hkd. They will pay 260 million this year for the land. Since they generate 200 mill + from operations, and opening new restaurants/catering do not require large upfront investments, and they currently have 600 million in cash, they will not need to issue shares.

 

Ofcourse the CEO is well connected so that plays a role in this, they have a good history of operating these things as well. Execution will be key here.

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The roll out of restaurant openings is pretty slow. I think of the 158k sg ft they have slated to open maybe 10% has been achieved by the end of the first half. I wonder about this rather lofty 158k sg ft. projection. I have no idea how profitable these new locations will be as they seem to be stepping out of Macau here.

 

I do like the stock with the new casinos and hotels opening up over the next few years.

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Profit before taxes was like 117 million. That is about 100 million NPAT? This does not include property business and food souvenir business. So that will likely be more then 200 million this year. If you include property rent, that is another 25 million, or about 225 million if this does not grow and food souvenir does not add anything. So a 12x multiple. But I think it is pretty unlikely that they will do worse then 275-300m in net income this year. Red thinks it is almost 400, but I think that is too optimistic.

 

Also not included in 'to be opened' are the catering projects that could be won in the new hotels and casino's. This could add materially.

 

You basicly have to look at it like this, comps are trading at 18x earnings, you get a business with very high return on capital that will likely not decline for a  non growth multiple with lot's of potential option scenario's. So yeah bear case, you break even, bull case you make 5-6x your money within a few years.

 

Your paying 12x earnings for the catalyst and dividend while you wait.

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More news was out last night. they signed a ten year franchise agreement to operate two Korean restaurant chains for ten years. An Italian themed chain and an upscale Korean eatery. I was hoping to see something like this as it expands their offerings.

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yeah and also excluding 25m rent they get I think. They did 180 last year I think. And judging by gross income and some operating leverage, I think they are on track to do at least 250 this year if they do not grow. But they have not yet opened the bulk of their new places. And also if they open these new places, they operate in prime locations with a lot of foot traffic. Or they do personel catering for some hotel or casino that is running. So it ramps up somewhat quickly. Not comparable to some restaurant in a small town trying to compete with 6 similar restaurants nearby.

 

And there are huge tail winds coming for Macau.

 

You gotta see it like this I think. They currently have like 140k sqft . This will be expanded to about 390 by 2017. They currently do about 6k/sqft with 35% gross margins. So if you assume foot traffic does not really increase, and their new places are only a moderate success at 4k/sqft and a 30% gross margin, then that will add over 300 million. Maybe add 70 million in SG&A expenses on top, I get +200 million in NPAT, or about 380m total NPAT. as 12x multiple on that is 62% upside.

 

BUT this assumes that new stores are not very succesfull, this assumes that current foot traffic does not increase, and this assumes that Hengqin will not really add anything. so this seems like a pessimistic base case to me.

 

If you look at Hengqin, that will be 80% let 20% operate. they get 1100hkd/sqft for their current Macau building. If they would only get 400/sqft then that is 171 million hkd. and a conservative 120mill for operating the other 20%.

 

If they actually improve revenue/sqft in Macau, then I get like 600 million excluding Hengqin by 2017. Hengqin will cost a billion hkd. They will pay 260 million this year for the land. Since they generate 200 mill + from operations, and opening new restaurants/catering do not require large upfront investments, and they currently have 600 million in cash, they will not need to issue shares.

 

Ofcourse the CEO is well connected so that plays a role in this, they have a good history of operating these things as well. Execution will be key here.

 

But how many shares will they issue to pay for this? I would guess Hengqin will need a lot of money for development so isnt quite a free option

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This is a high return on capital business, FCF will be pretty high. If you read the post you would see they need another 400 million. I think they will generate 150-300 million this year alone. They don't need large up front investments for their other expansions because they lease it. So maybe they will issue some debt, but I don't think you will see any share issues from now on.

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I think FB is definitely is an interesting story with great historical operational performance and a good runway of growth to come.  The part I am getting hooked up on is how to actually think about the new risk profile given the majority 125k sqft (almost 100% of today's GFA) is coming from outside Macau.  I know you did discount the Macau operations when you ran the new sqft projections, but given the experiences of other HK brands moving into China and the difficulties even a top brand like Tsui Wah is encountering I could definitely see further downside to those #'s (granted Tsui Wah is investing for a full scale invasion unlike these guys).  And if you look at 50k of the new sqft as being a food court in the brand new Zhuhai mall and realizing they just shut down a food court in the Galaxy (their own backyard) - I can't completely eliminate the scenario where an entire 50k is not making money or in fact losing money for a couple of years.  Furthermore, I have some doubt that their brands really carry any weight at all outside of Macau, it seems their success is mainly due to their convenient locations within hotels like you guys touched upon earlier (don't see a local Zhuhai resident knowing/caring about Edo or whatever other brands they might role out). 

 

Don't get me wrong I don't think this is a base case by any means but given what happened at Galaxy I don't think it should be eliminated from consideration either and just wondering if you have a better way to think about this near term risk because I definitely want to be there for the Cotai stuff down the road.

 

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stock is down a bunch. VIP gambling is trending down almost double digit % in the past few months. I doubt it has much impact though. Mass market is still going strong and provides more revenue for food service industry. Would buy if it wasn't a 10% position already. And gamblers still have to eat. VIP gamblers can only eat so much :) .

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I've sold my shares as have heard things are slowing down. They have so many things going on I want to watch for awhile.

 

Invested the funds in TSEM. Trying to keep my positions down.

 

http://seekingalpha.com/article/2450305-towerjazz-a-towering-double-in-share-price

 

100% upside is possible based on possible FCF. Using up idle capacity and taking out over $100 in fixed costs as they shuttered a fab. The numbers look pretty good when you pencil it out.

 

 

 

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I think the bull case for FB is pretty basic. They are going to double their restaurant footprint within 3 years. They will also land some industrial catering jobs. Hengqin will add value. More people will be going to Macau in 5 years than now. Just need time for this to roll out.  It will double.  One of my 6 holdings.

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yeah it is trading for like 10x earnings. That seems too low even without growth. you see mass market is still growing this year. But a somewhat big decline for VIP.  Im going to wait for new infrastructure at the end of next year or so. Ill hold it for 1.5-2 years and see what happens.

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