GGRAsia – NagaCorp underpriced on VIP growth: Union Gaming

NagaCorp underpriced on VIP growth: Union Gaming

Apr 30, 2015 Newsdesk Latest News, Rest of Asia, Top of the deck

NagaCorp Ltd, a Hong Kong-listed casino operator with a monopoly in the Cambodian capital Phnom Penh, has “growth drivers as far as the eye can see”, said a note on Thursday from Union Gaming Research Macau Ltd.

The research house puts a ‘buy’ rating on its shares with a price target of HKD8.00. The stock was at HKD5.53 – down 0.54 percent from Wednesday’s close – in morning trading on Thursday.

“In our view, shares of Naga have been unfairly penalised (down 35 percent from the March 2014 peak) as they have been lumped in with other Asian gaming equities in the Macau downturn,” said the report from Grant Govertsen and Felicity Chiang.

In its unaudited first quarter results to March 31, NagaCorp’s current Cambodian casino operation NagaWorld (pictured) reported VIP rolling chip turnover for the three months to March 31 up by 79 percent to nearly US$1.70 billion, from approximately US$946.1 million in the year-prior period.

“This was done primarily on the backs of the company’s existing junket network out of Southeast Asia, plus some benefit from the Chinese-based Asian Nations junket,” said Union Gaming.

The research house is forecasting NagaWorld’s rolling chip volume for the whole of 2015 will be up 77 percent, to US$10.9 billion; followed by a 22 percent increase in 2016 from the improved base.

It cites other earnings growth drivers as including three greenfield schemes. They are: a shopping complex next to NagaWorld called NagaCity Walk and due to open in 2016; a VIP-focused property called Naga2 currently under construction and likely to open in 2017; and a new casino-hotel project in the Primorye region of the Russian Far East near Vladivostok.

“We expect the company to formally break ground in Vladivostok, Russia in the very near term, and would expect operations to commence on this US$150 million project (Phase 1) by early 2018,” said Union Gaming, adding the scheme was likely to have 70 mass market tables, a yet to be determined number of VIP tables, 500 slots and electronic games and 400 hotel rooms.

Daiwa Securities Group Inc – which does not issue a rating on NagaCorp – has issued a more cautious analysis of the NagaCorp story.

In a note on Tuesday, following the Daiwa Consumer and Gaming Conference 2015, analysts Jamie Soo and Adrian Chan stated: “Due to an equity funding agreement in 2012, Dr Tan Sri Dr Chen Lip Keong (CEO of NagaCorp) will hold 65.4 percent of NagaCorp (currently 50.4 percent) after the opening of Naga2 and NagaCity Walk.”

The Daiwa analysts added that the favourable tax regime in Cambodia for casino operators – an all-in fixed tax rate equivalent to approximately 2 percent of gross gaming revenue (GGR) – is due to expire in 2018.

“However, management believes the structure of having to pay a fixed gaming tax will remain. Management does, however, expect this fixed amount to increase due to the opening of Naga2 effectively doubling the number of tables of its current NagaWorld property,” added the Daiwa team.

In early April the Phnom Penh Post newspaper – quoting a senior Cambodian government official – said a bill to regulate the management of the country’s casino industry was likely before year-end. The report made no mention of whether some form of tax on GGR – as occurs in Macau and Singapore – might be introduced.