Yongtai fly fly

*Yong Tai* (41 sen) – *A new lease of life*

Yongtai recently held its investor briefing on 3 July to share the latest updates on the company.

The stock came into the limelight recently when Fan Bing Bing visited Melaka as the group is one of the listed companies with exposure to Melaka tourism segment through its concert hall and hotel. The stock price surged by +78.2% from its YTD low in mid-Apr.

*Background*
The stock was under the radar for the past several years due to the underperformance of its financials. Its balance sheet in particular was under immense pressure due to the large debt on its book while cash flow was strained.

The large debt was a result of the capital raised to construct Encore Melaka Theatre (concert hall) in Melaka and Courtyard Hotel in Melaka.

Encore Melaka Theatre was completed in July 2018 but it unfortunately have to shut down operations due to Covid. However, there were ongoing costs including utilities and manpower that the group need to pay during the closure period.

As at 31 Mar 2024, the group’s net gearing stood at 71.9% and we understand that the average interest rates were as high as 10%.

*Turnaround plan*
The visit of Fan Bing Bing to Melaka coincided with a time when the group is undergoing a transformation and has strategies in place to turnaround the company.

Among the positive developments include:

*1) Reopening of Encore Melaka Theatre and collaboration with Sichuan Tourism Investment Group*
Encore Melaka Theatre will be reopening this month on 7 July.

Recently Yong Tai also signed a collaboration agreement with Sichuan Tourism Investment Group (STIG). As background, STIG was established in Apr 2017 and approved by Sichuan state government.

Under the agreement STIG will manage and operate the theatre with a target of achieving 70% occupancy rate within 6 months. For perspective, pre-pandemic the occupancy rate was around 40%. STIG will work on bringing more Chinese tourists and tours to Encore Melaka Theatre.

*The group projects that under a 50% occupancy rate assumption, the annual core profit for the segment should be around RM5.5m.* Note that this assumption is below the target set by STIG, which is at 70%. At 70% occupancy rate, annual core profit is estimated to be RM14.4m.

This is a positive development on several fronts including:
i) the reopening will see positive cash flow from the asset, helping to service the group interest payments and working capital;

ii) the reopening coincided with China Visa Free Travel, Fan Bing Bing visit which garnered significant interests on Melaka which should augur well for tourist visit to the venue; and

iii) the collaboration with STIG capitalizes on STIG expertise which help Encore Melaka Theatre in many aspects including revamping its ticket pricing and marketing strategy as well as using its network to bring in more tourists.

*2) Disposal of Courtyard Melaka*
The group decided to dispose Courtyard Hotel to repay some of its debt and liabilities. While Courtyard Hotel is doing well currently, however, unfortunately, it is also associated with high cost debt, thus, the net profit from the asset is less than ideal.

The current recovery in hotel industry has made it an opportune time for the disposal as the valuation of the hotel is attractive. The sales proceed is anticipated to be around RM160m, while the gain from disposal is expected to be around RM50m.

*Net gearing is expected to improve significantly to 5.8% from 71.9%.* The sales proceeds will be used to reduce borrowings and complete its ongoing property projects including U-Thant in KL and The Dawn in Melaka. With this, the average interest rate is also expected to decline significantly to around 6% from 10% previously as the group pay off its high interest debt.

*3) Property development*
The group targets to launch its The Dawn project (GDV: RM300m) in Sep/Oct 2024. Note that this project already have construction progress of 30-40% but progress was stalled due to cash flow constraint. The group should be able to resume construction with the capital from the disposal of Courtyard Hotel.

As such, upon launch, for any sales secured, the group would be able to immediately bill 30-40% of the sales as revenue.

Secondly, the group plans to complete its ongoing project U-Thant (GDV: RM200m) which is at 70% completion.

Finally, the group is in the midst of acquiring a land in JB near to RTS. Indicatively, the GDV of the project is RM1.5bn, while the group may take a 60% stake in this development, giving it an effective GDV of RM900m. The land cost-to-GDV is attractive at around 7%, which should give the project very attractive margin.

Assuming this deal materializes, the project is estimated to give the group and annual earnings of RM56m (assuming 100% take-up rate, 25% net profit margin and 4-year development period). The project is likely to be launched in 2HFY25 (FYE June).

*FY25 profit guidance*
The group shared its earnings projection for FY25:
i) Encore Melaka Theatre (RM5.5m)
ii) Property development (RM20.6m)
iii) Disposal gain (RM50m)
Total: RM76.1m

*Excluding disposal gain, core profit for FY25 is estimated to be RM26.1m (EPS: 6.2sen). Based on current price of 41 sen, this implies PER of 6.2x.*

*A new lease of life*
After 3-4 gruelling years surviving through the pandemic, it appears that the group may finally see the light at the end of the tunnel.

The tourism recovery, promotion of Melaka as tourist spot augur well for both the resumption of Encore Melaka Theatre and valuation of Courtyard Hotel Melaka disposal.

FY25 will be an execution year for Yong Tai. It remains to be seen if the group will be able to execute its plans as outlined above. If executed well, this should put the group back to a sustainable recovery and growth path.