As Chinese President Xi Jinpings red carpet reception in the UK recentlyunderscored, thelocus of the world economy will almost undoubtedly be shifting to the Asia Pacic region in thecoming years. Clever investors should be asking themselves how they can capitalise on therising buying power of this increasingly wealthy region.
Merlin Entertainments (LSE: MERL) presents one possible opportunity to prot from thegrowing middle class in countries such as China and Thailand, as well as developed countriessuch as Japan, South Korea and Singapore.
Merlin, the operator of theme parks and attractions such as Legoland, Madame Tussauds andthe London Eye, has one of the key competitive advantages all investors should look for in a company: a strong moat to competitors entering the eld. Due to the massive costs associatedwith developing theme parks and the difculty in building a well-known brand, Merlin andleader-in-class Disneyenjoy signicant competitive advantages over newcomersto the eld. Merlin has exploited this to achieve operating margins of 25% across the company,and margins over 30% at Legoland and Midway theme parks.
The growing wealth of the Asia Pacic region hasnt escaped the notice of Merlins leadership, and the company is investing heavily in expanding its footprint there. In addition to over a dozenattractions operating in seven Asian countries, the company is opening Legoland parks in Japanand Korea in the next three years, and announced during President Xis visit that it will bemoving forward with Legoland Shanghai and new Midway-branded theme parks tailored to theChinese market.
The expansion of Legoland parks in Asia is an astute move as Lego, the privately held Danishcompany, has revealed sales in Asia writ large have seen double-digit increases year on yearand Chinese sales have increased 50% two years running. With the 30%+ margins Merlinextracts out of existing Legoland parks, investors should be very pleased with these plannedexpansions.
For scal year 2014 Merlin recorded 13% of group revenue coming from Asia but the companys long-term goal is to increase this number to a third. While the stock trades at a relatively pricey 25.71 price-to-earnings ratio, the company is protable year after year, with EBITDA of 123m on544m of revenue in the rst half of 2015, and pays a small dividend of 1.57%.
Although share prices for Merlin are down 10% from their highs in May, due to one-off hits toprots stemming from a serious roller-coaster accident at Alton Towers and subsequentlowered attendance, the stock remains expensive. With proven protability and strong prospectsin growing Asian markets, I see Merlin as a company with strong upside potential and should bewatched closely as a buying opportunity if its shares suffer during a future dip in price.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.