Saigon Cargo Services: Vietnamese Air Cargo Terminal Operator with Growth “Runway”

Clement Loh of Lion Rock Partners presented his in-depth investment thesis on Saigon Cargo Services (Vietnam: SCS) at Best Ideas 2018.

Saigon Cargo Services is one of two air cargo terminal operators located in the Tan Son Nhat Airport, which serves Ho Chi Minh City and southern Vietnam. SCS benefits from a strong moat based on its privileged location and earns 40% return on equity as a result. The only competitor, Tan Son Nhat Cargo Services, is at capacity and has no available land for expansion. SCS is running at 70% of phase one capacity of 200,000 tons and can easily increase capacity to 350,000 tons. Revenue is expected to compound at 15% for at least the next six to seven years from cargo traffic growth and pricing power. Clement expects almost all of the incremental revenue to turn into free cash flow as the business has significant operating leverage and low maintenance capex needs. Management has adopted a transparent culture and intelligent capital allocation policy, with a majority of cash flow returned as dividends. The business also has potential options for further revenue streams by developing unused real estate at their prime site next to the airport. The major risk (and opportunity) for SCS lies in the development of a new airport expected to start operations in 2025. As the major shareholders in SCS are the military and the airport authority, it is likely SCS will play a major role in the new airport, but details will not emerge for another few years. SCS shares were recently valued at 17x 2018 earnings or 5x peak cash flow (when capacity is reached in 2023). Clement believes a business with such a strong moat and reinvestment opportunities should have a higher valuation and provides a good margin of safety for the long-term investor.

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About the instructor:

Clement Loh is the Investment Manager of Lion Rock Partners, a private family fund based in Hong Kong. The fund applies the principles of value investing to seek out companies with competitive advantages selling at a reasonable price with a focus on emerging Asian markets and smaller companies. Clement holds a master’s degree in business administration from the University of Toronto and a degree in pharmacy. Prior to entering the investment profession, Clement worked in the pharmaceutical industry and is a non-practicing pharmacist. His interests include economics, strategy, science, education and history.

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