This article is part of our Rising Star Portfolios series.
One of the nice things about living in Washington, D.C., is that there are plenty of historical and cultural sites to visit (if that's your thing). A few months ago, I went down to Charlottesville to visit Monticello, Thomas Jefferson's old digs. Tickets cost $22 per person, and we were happily asked to pay for overpriced drinks and ice cream while we waited for our tour to start.
Frankly, I don't remember much about Monticello the house or the grounds, but I do remember some back-of-the-envelope calculations I was making in my head as we saw group after group be led from one high-margin exhibit to another, through one high-margin gift shop to many, many more. When I got home, I immediately checked to see if Monticello was a publicly traded company -- alas, it is not. But why would an investor be so interested in the first place?
Monticello is like an amusement park or a movie theater, except you don't have to build it. People visit your site and accept absurdly high prices for things that would otherwise be free ($5 bottled water, for instance). At the same time, your costs are tremendously low because you have basically no capital expenditures whatsoever: You pay your tour guides, you pay your groundspeople, and you pay your cashiers. That's pretty much it. And oh, did I mention that you can charge basically whatever you want as an entrance fee?
I think I just did
But the trouble is finding a publicly traded company that exhibits these almost dream-world economics. Monticello, like most other attractive sites in the United States, is maintained by a private, nonprofit organization: the Thomas Jefferson Foundation. And in some intangible albeit very real way, this makes sense because it just feels ethically wrong to try to profit from our third president's personal heritage; it just felt un-American.
Thus it came as no surprise to me whatsoever that a company like China Yida (Nasdaq: CNYD ) existed. Oh, happy day! Like the Thomas Jefferson Foundation, Yida also manages, maintains, and generates revenue from operating tourist attractions. Unlike the Thomas Jefferson Foundation, however, Yida is neither private or nonprofit. In fact, it is very, very, very profitable. The company reported a 50% net profit margin in 2009, and if it were to stop spending any money on expanding and developing new sites, would probably return 45 cents of free cash for every dollar of revenue it brought in.
How is that even possible? Shouldn't the eternal laws of the market dictate that those margins be eroded away by price competition?
Not if you have a monopoly, it doesn't! Yida has exclusive management rights to the Great Golden Lake, the Hua'an Earth Buildings, and four other properties currently in development. Those names mean just as much to me as they probably mean to you (blergh?). Grand Canyon and Niagara Falls these are not, but the Hua'an Earth Buildings are in fact designated as a World Heritage Site by no less an authority than the United Nations Educational, Scientific and Cultural Organization (UNESCO). Getting that label is like winning the Nobel Prize of tourist attractions, escalating it into the same category as the Great Wall, the Statue of Liberty, and, even, the aforementioned Grand Canyon.
Yida's Great Golden Lake is a "global geopark" -- a designation it shares with other geological sites like China's Huangshan mountain range, which is also a UNESCO World Heritage site -- and ranked as one of China's Top 10 Most Appealing Destinations.
China Yida's Great Golden Lake – don't you want to go there?
Source: Company presentation.
How Yida came to possess such valuable resources should probably be a tale of intrigue and corporate espionage. The reality is much less exciting. In acquiring exclusive rights to the Great Golden Lake, Yida essentially said, "Hey, I see you've got this beautiful lake and mountain complex that you've completely ignored. Why don't you let us help you monetize this otherwise worthless resource?" And the Taining county government said, "Give us a 20% cut on entrance tickets and we have a deal!" Yida then spent $30 million on developing the site to take it from 22,000 visitors in 2006 to 637,000 by 2009. Like many other small businesses, the company spent seven years working on a single project, the Great Golden Lake site, but once it had proven its worth, it landed the Hua'an Earth Buildings contract in 2008 and three other contracts in the past two years; when it rains it pours.
About that rainmaking
One might still say it's crazy that they're able to operate at a 50% net margin -- don't they get squeezed when they try to advertise and their television-time suppliers see that outrageous profitability? (Would I have planted that question if I didn't have a good rebuttal?) The answer to both these questions is no. No to the latter because it was rhetorical, and no to the former because Yida also manages the Fujian Education Television channel, which is ranked No. 4 in ratings in the entire province. It's very convenient considering that (a) both the Great Golden Lakes and the Hua'an Earth Buildings are in Fujian province, (b) the management contract consists of a flat $1.5 million annual fee (while Yida pulls in $20 million in revenue each year by reselling advertising airtime on the network), and (c) Yida can thus advertise its tourist attractions for basically zero cost.
So this company is essentially a super high-margin monopoly -- how could anything possibly go wrong? Well, it's a Chinese small-cap that came public via reverse merger, for one. A rhetorical question to shed some context on that fact: Why would anyone ever enter a building through a back door if the front door is bigger, more convenient, and people throw money at you to do it? Suffice it to say that corporate governance may not be strong with this one.
Taking a closer look, we note that as recent as May of this year, China Yida's auditor was Kabani & Co. Not to hate, but Kabani's client list isn't exactly the most stellar, with China Green Agriculture (NYSE: CGA ) accused of accounting fraud just a few months ago. Since May, Yida has actually switched auditors not once but twice, finally settling on Friedman LLP. Now, there are plenty of legitimate reasons for why Yida is playing musical chairs with its auditors and why none of the invited houseguests are Big Four names; but whatever the case may be, Caeser's wife Yida probably is not.
The founder/CEO/Chairman is a man named Minhua Chen. Obviously a very capable man, Mr. Chen is the vice president of the Fujian Provincial Tourism Institute (explains a lot about how he got these projects -- he is his own "government connection") and a part-time professor at the Tourism College of Fujian University. Prior to this, he was a journalist and editor-in-chief of various local and regional magazines. This is all fine and good.
Where it becomes interesting is where we find his wife, Yanling Fan, also listed as a director of China Yida. Each owns 27.5% of the company. Granted, by Western standards this isn't a great situation, but it isn't uncommon in Chinese companies. What really perplexes even me, though, is that neither of them has taken any salary or other financial compensation from Yida in the past two years (at least). You would think that's a good thing, and maybe it is, but having seen capitalist enterprise in China, I personally think it's worth raising an eyebrow for.
Still, the biggest worry (besides the possibility that this is somehow a fraud, which should not be an unrecognized risk), is that they're simply growing too fast. Mr. Chen does not have a significant business background or track record of rapidly expanding an operation as it seems Yida is planning to do. In its press releases, the company has done a good job of being transparent and predicting approximately how much capital expenditure it will be spending on its future projects. If nothing else, I expect those to be vastly wrong. That's not a terrible thing -- I don't expect anybody to predict the future with great accuracy -- but I guess I'm just wondering, "Will everything really go as planned?"
On the whole, I'm very, very impressed with the business model and the past operational history of this company. There's still a lot we don't know about this company, and as always, even more that we don't know we don't know, but I think it's worth keeping an eye on, so we at the Dada Portfolio plan on taking a $500 nibble.
Make no mistake; this will most likely be a very, very risky and volatile position. From top to bottom, China Green Agriculture's fraud accusations have shaved 40% off its market value -- and they haven't even been proven yet! I can't guarantee that Yida doesn't have even worse in store. But I am comfortable with that risk if it is position-sized accordingly. Moreover, on the flip side, we also truly believe this company could have most of their new projects fail and still be at least 50% undervalued. If the company sees even just one or two of the parks in their pipeline "hit," this could be a 3- or 4-bagger, easy -- and if Mr. Market is going to let me wager a quarter with a good chance to earn back a buck, I'll take that bet any day.
The Dada Portfolio is a part of the Rising Star series of real money portfolios. It is co-managed by Sean Sun and Ilan Moscovitz. If you're interested in learning more about China Yida or the portfolio, click here to join us on our discussion board.
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