Post-Mortem Series 1: Reviewing Sim Leisure after 8 months (+90%)
Post-Mortem Series 1: Reviewing Sim Leisure after 8 months (+90%)
Sometimes blanket statements like "business got no moat" and "currency risk" make investors miss out investing gems
This post will be the initial Post-Mortem Series where I review back investment thesis, be it a bull or bear case previously published on my Substack.
If you haven’t read the thesis on Sim Leisure (SGX: URR), head here to read it.
What happened to Sim Leisure over the last 8 months?
Sim Leisure is up 90% from the date I analyzed and published my analysis on the company.
It took me quite some time to dig into every available detail about the company’s business model, its competitive edge, its competition, its founder and also its operating efficiency.
I specifically highlighted the niche that Sim Leisure positions itself: do away with all the licensing and trademarks - fun can still be fun.
The value proposal of Sim Leisure brought me surprise and some skepticism when I read about it.
Get this: the current theme park business model can be out of reach of the majority - given that some parks can cost US$120 [RM570] to US$150 per ticket. Licensing and trademarks, add to a capex-intensive business model.
The only comment I got so far on the post, is that the company does not have a moat, which I concurred back then.
Even when I presented the same company for my admission to Kairos, the concern about the company reporting its earnings in Malaysian Ringgit while having its shares traded on SGX and denominated in Singapore Dollar was bad enough for some members to write off this potential investment due to currency risk.
Touché. These still hold some grounds as elements and factors of risk. But it should not write off any bullish thesis and prospects the company holds.
Defining Sim Leisure’s moat
As you can see in my previous comment, back then I never admitted the company had any sort of moat.
But the more I think of how and what a moat is, Sim Leisure’s moat started to materialize.
It’s not a big fat moat per se, but a moat something as what Monish Pabrai explained of the Patels buying up motels and renting it as cheaply as possible, with possibly no other competition able to do better.
“They’ve gone into the Marriotts and the Hyatts and the Hiltons, and they’ve done a masterful job because in all the cases — whether it’s a motel or any of these other types of hotels — their competitive advantage has always been lowest cost operator,”
The Dhando Investor by Monish Pabrai
Sim Leisure has a track record of running profitable theme/leisure parks, a segment of the hospitality business that can be brutal. Utility costs (water, electricity) and any other licensing and trademarks can usually leave park operators without any profits to upkeep, maintain or even reinvest back.
Sim Leisure’s value proposition does away with the licensing and trademarks, believing that fun can still be fun without Disney or Nintendo characters. And most of its attractions are not mechanical, which means lesser power consumption even during off-holiday periods.
Not an impregnable moat, but a wide and shallow moat nonetheless.
Not to mention it has a track record of buying over and revamping KidZania KL when it was bleeding money under the previous owner.
Sim Leisure’s thesis rested on the shoulders of founder and CEO Dato Sim
You would find an entire paragraph digging deep into Dato Sim’s history, vision and aspiration of the company.
Compared to my analysis of an evergreen and global business like Linde Plc LIN 0.00%↑, there is less emphasis on who is at the helm.
A challenging business model requires a visionary who still chooses to work on it because of passion and vision. The same drive that Elon Musk has when he runs TSLA 0.00%↑, SpaceX and other initiatives.
Put simply, if Dato Sim is no longer running the company, the bull thesis of the company would collapse.
If you are a pessimist, call that having a key man risk; I call it having a founder-led company knowing its vision, niche and strength.
Debunking or quantifying the currency risk
The Malaysian Ringgit gets plenty of flak for being on a depreciating curve most of the time.
Thus I get the concern for a company reporting its earnings or financials in Ringgit, yet trades on the SGX, with share price denominated in SGD.
But to put things into a better context, all of their theme attractions construction business is in USD, while only the theme park business is in MYR.
And with KidZania Singapore slated to open, with Sim Leisure as the operator, the currency risk would be further diluted, since tickets will be in SGD, with the attraction located at prime Sentosa Island.
Yes proportionately as of now all of the other theme parks apart from KidZania SG are concentrated in Malaysia. But so long as the revenue growth can sustain or even outrun the depreciation of the currency, it shouldn’t be a show-stopper on the company’s prospects.
Additional findings on top of the original Substack post on Sim Leisure
I took the initiative to compare Sim Leisure’s Return on Assets versus other world-class pure-play theme park operators SIX 0.00%↑ & FUN 0.00%↑.
Sim Leisure was getting $0.05 for every $1 worth of assets, very in line with the world-class theme park operators.
Even margin-wise, EBIT and net margin Sim Leisure turn out to be in line with the big boys
This means numerically and quantitatively, Sim Leisure’s model may look inferior on paper without the famous mascots, but fundamentally from a business point of view, it performs on par with the other big theme park names.
Even if it is smaller in size, it shouldn’t be traded at a severe discount, given that successful theme parks will always keep drawing more crowds.
Back then, assuming no revenue growth from existing business, plus the revenue from KidZania Singapore, on top of a lower net margin factoring startup cost and zero P/E expansion, the very conservative valuation was S$0.71.
We are looking at a 90% gain in this case as of the time of writing.
Hindsight and lessons
This is not a post to dictate who’s right or wrong. Nor is it to gloat. It serves as a lesson and reminder to all investors alike.
I commit such mistakes and make blanket statements, writing off companies before studying deeper. I am fortunate to be on the lucky side of this thesis.
I almost did not do a deep dive on Sim Leisure. And even after all the study, I was on the fence too. It’s not a company that fits my “Buy, hold & compound” strategy. However I learnt another aspect of investing, and I thought setting aside a small stake would give me some skin in the game to prove the validity of the thesis.
I am glad I did my due diligence, bought a small stake, and my thesis played out well.
Illiquid counter? Not a problem
Susceptible to the pandemic? Not a problem. Management has experience in keeping the company afloat during the previous pandemic.
No wow factor? Not a problem. Fun can come at an affordable price, something value-conscious Malaysians and middle-income families around the world go for.
At the current price, I would need a lot of vindication to add to my position. But more than happy to hold onto my current stake and see how this business thrives.
Kudos to my pal, Anson for harassing me to study the company. Glad that we were 2 of the 67 shareholders that were disclosed in their previous year's annual report.