Asian casino operator and investor NagaCorp Ltd is well-placed to take advantage of China’s economic growth in its core market of Cambodia, says a new report from brokerage Morgan Stanley Asia Ltd.
Hong Kong-listed NagaCorp “scores better than Macau on three fronts – a monopoly through 2035, lower tax, and lower labour cost,” noted analysts Praveen Choudhary and Jeremy An, initiating coverage of the stock.
They were referring first to the exclusive rights NagaCorp has to run casino operations in and around the Cambodian capital Phnom Penh, compared to the remaining time on the current Macau concessions that expire in either 2020 or 2022.
Their second reference was to the current flat taxes payable on gaming equipment used at the group’s properties NagaWorld (pictured) and Naga 2 – the latter opened in November – in Phnom Penh, which are nonetheless typically adjusted upward on an annual basis. In Macau the effective tax rate on casino gross gaming revenue (GGR) is 39 percent, although there have been calls for the Macau government to revisit the GGR tax rate issue prior to the expiry of the current concessions.
A tax on casino GGR is envisaged under a proposed Cambodian casino law, but that would still in likelihood mean a burden equivalent to only “mid single digits” of GGR for Cambodian operators, said a note last month from brokerage Union Gaming Securities Asia Ltd. In the autumn, Tim McNally, chairman of NagaCorp, told GGRAsia that for 2016, the firm’s effective tax for total revenue was “about 4.8 percent”.
Regarding labour costs, not only is the underlying cost of living lower in Cambodia than in Macau, but in the latter market the costs structure of the casino labour market is also influenced by the fact that only Macau ID holders can be employed as dealers, and local frontline gaming workers are active in lobbying employers on pay and working conditions.
Morgan Stanley suggested that NagaCorp would be a “key beneficiary” of political and economic developments regionally, including China’s “Belt and Road” initiative designed to create new infrastructure in countries and places along traditional trading routes with China; and Cambodia’s “China-Ready” policy, which aims to attract 2 million Chinese tourists to the country annually by 2020.
“We believe the opening of Naga 2 and benefits from China’s Belt and Road initiative should drive [NagaCorp] earnings before interest, taxation, depreciation and amortisation [EBITDA] growth of more than 20 percent per annum through to 2020,” noted the Morgan Stanley analysts.
“Our EBITDA estimates are below consensus owing to inclusion of potential revenue tax of 5 percent starting 2018. However, tax overhang remains until it’s announced, expected in the second half of 2018,” they added.
The institution also suggested that two VIP gambling promoters prominent in the Macau market – Suncity Group and Meg-Star International – “will be added in first-half 2018”. Suncity was said to have opened VIP facilities at Naga 2 earlier this month.
NagaCorp posted a net profit of US$255.2 million for 2017, up nearly 39 percent from the previous year. Revenue for the period increased by 80 percent year-on-year to US$956.3 million, the firm said in a filing in early February.
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Daniel Boone Wayson
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