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QuestionsCategory: Financials QuadrantFuture Bright Holdings
Andy Ang asked 8 years ago

Viewed your webinar on financials and noticed that you mentioned about future bright holdings. I looked thru the company and found that this is quite an interesting company:
Business: the company deals in food and beverage business and they serve numerous cuisines from Chinese to Portuguese to Japanese mainly in Macau. I believe management doesn’t have plans to expand to the other markets, just focusing mainly in Macau. Most of their restaurants are located within the gambling area, hence their revenues shld be closely related to Macau visitor numbers.
Management: key management has been with the company since 2004, and they hold about 45% of all shares (which is good). In terms of remuneration, Mr Chan (I believe he is the key man here) was paid HKD 12.8mil in 2013, which I thought was rather high relative to rest of his board members. However, his salary is about 4.5% of 2013 net income… Is this a cause for concern?
Financials: I used the checklist provided by you guys and Future Bright passed most of the criteria. Cash ratio has been above 0.8, negative cash conversion cycle due to their high day payables, +ve free cash flow even though they are committing capex to expand a building into their central kitchen in the future. 
Rusmin, mentioned concerns about fair value gains of their property which is hkd120mil in 2013, HKD125mil in 2012.. Stripping that out from their net income attributable to shareholders, net income is still positive, however in that case, future bright would have failed the 1st test of rising net profit… Thanks Rusmin for pointing that out, We would not have known if we simply look at the numbers given by Morningstar.
My question is: under what circumstances do we take this “fair value property gain” out from net profit? It seems that Mr Chan is keen to divest part of the cash in property for rental income. Can you kindly check if my points are relevant?

2 Answers
Rusmin Ang answered 8 years ago

Hi Andy,  
Yes, I briefly mentioned about it during the Webinar.   
Business – You’re right that majority of the biz came from Macau. And their success mainly driven by tourism boom in Macau which effectively becomes their key market. Though it is still preliminary, my understanding is that Mr Chan is planning to diversify into other market as well. You may want to check it out? (Hint: For most tourists, which country do you visit before or after Macau trip?). Apart from the restaurants, you may also want to check out their industrial catering units too.   
Management – Good spot! Shouldn’t be at the moment. My opinion is that he got a modest pay relative to the profit he brought in to his shareholders. Do you know the the celebrity Alan Tam endorsing its new venture, food souvenir awarded with share options of 5 million at $3.07? Now we know how much they are being paid to endorse products :P     
Financials – You’re welcome, Andy. Any investment that’s one-time (not recurring in nature) should be excluded. Having said that, you can definitely include its rental income in your analysis since it is recurring. From my experience, most F&B companies prefer to own some stake in properties to mitigate escalating rental costs. However, it seems like Mr Chan has bigger plan for that. If you read the latest annual report, he intends to build a food plaza in Hengqin Island.   
By the way, what a great analysis you’ve got! :)

Andy Ang answered 8 years ago

Thanks for the guidance thus far! I have learned a lot for your webinars =)
In terms of valuation methods, can I use Price to CF, DCF to value the company? For DCF, I can use either it’s earnings, OCF or FCF to value. Do you have any suggestions for this and why?
For this coy, if I were to do some ground checks, what should I be looking out for? (I’m going to Macau over the weekend, so I think it’s a good opportunity to do some “scuttle-butting”)