Asia Entertainment & Resources' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.23.13 | About: Iao Kun (IKGH)

Asia Entertainment & Resources Ltd. (AERL) Q1 2013 Earnings Conference Call May 23, 2013 11:00 AM ET

Executives

William Schmitt – ICR

James R. Preissler – Director of Asia Entertainment

Lam Man Pou – Chairman

Li Chun Ming – Chief Financial Officer

Edward Chen – Assistant to the Chairman

Leong Siak Hung – Chief Executive Officer

Analysts

Steve T. Altebrando – Sidoti & Co. LLC

Echo Y. He – Maxim Group LLC

Brad J. Boyer – Stifel, Nicolaus & Co., Inc.

Chris B. White – Greenstone Capital Management Partners LP

Mark Giambrone – Barrow, Hanley, Mewhinney & Strauss LLC

Brett Reiss – Janney Montgomery Scott LLC

Operator

Good morning, ladies and gentlemen, and thank you for standing by. And welcome to the Asia Entertainment & Resources Ltd. First Quarter 2013 Earnings Conference Call.

As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

I would now like to turn the conference over to (inaudible) with ICR. Please go ahead.

Unidentified Company Representative

Thank you, and welcome everyone to Asia Entertainment & Resources Limited first quarter 2013 earnings call. Participating on the call today will be our Chairman, Mr. Pou Lam; our COO, Mr. Kun Vong; Mr. Hung Leong, Chief Executive Officer; Mr. Raymond Li, Chief Financial Officer; Mr. Edward Chen, Assistant to the Chairman and Mr. James Preissler, Director of Asia Entertainment.

The Company issued a press release reporting financial results for the three months period ended December 31, 2012, which can be accessed at the most financial websites, as well as our own at www.aerlf.com.

For the purposes of this call all figures presented will be discussed in U.S. dollars. This conference call may contain in addition to historical information forward-looking statements about AERL within the meaning of the federal securities laws. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements other than those that are historical in nature.

These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may case actual outcomes to different materially from the expectations reflected in these forward-looking statements. For more information on these matters, we encourage you to view AERL’s SEC filings.

With that, I would like to turn the call over to Mr. Bill Schmitt of ICR.

William Schmitt

Thank you, (inaudible). I would like to briefly go over the financial results for the quarter and then hand the call over to Jim Preissler to give an overall view of the business and discuss some of the more recent trends and our announcement earlier this week on the Royal Arc Casino.

Revenue for the first quarter of 2013 was $64.4 million, a 4.4% decrease from $67.3 million in the prior year period. Net revenue as a percentage of Rolling Chip Turnover was 1.57%, up from 1.25% in the prior-year period. AERL’s primary expense is commissions to agents, which was $42.7 million in the first quarter of 2013, down 1.8% from $43.5 million in the first quarter of 2012.

Commissions to the agents as a percentage of Rolling Chip Turnover was 1.04% in the first quarter of 2013, up from 0.81% in the first quarter of 2012 as a result of higher percentage of commissions paid to non-marker agents and a smaller percentage of direct business in relation to the Total Rolling Chip Turnover.

SG&A expense as a percent of Rolling Chip Turnover was 0.14% in the first quarter of 2013, up from 0.09% in the prior-year quarter. Non-GAAP operating income before amortization and change in fair value of contingent consideration for the first quarter of 2013 was $15.3 million or $0.38 per diluted share, a decrease of 16.8% from $18.4 million or $0.43 per diluted share in the same period of 2012, due primarily to our continued policy of conservative credit extension, which resulted in lower revenue due to reduced Rolling Chip Turnover.

Non-GAAP income before amortization and change in fair value for contingent consideration margin as a percentage of total revenue in the first quarter of 2013 was 24.9%, down from 27.3% in the first quarter of 2012. Income margin as a percentage of Rolling Chip Turnover was 0.31% for the first quarter of 2013, down from 0.32% in the prior-year period.

Net income for the first quarter 2013 including all items was $7 million compared to $15.3 million in the first quarter of 2012. GAAP, basic and fully diluted EPS derived from net income for the first quarter of 2013, was $0.17 based on a basic and fully diluted weighted average share average of approximately 40.7 million shares. The basic and fully diluted weighted average share counts were calculated in accordance with Generally Accepted Accounting Principles.

Turning to the balance sheet and cash flow statement, cash on hand as of March 31, 2013 was $24 million. Cash provided by operations was $16.4 million for the three months ended March 31, 2013, which includes the cash used to purchase markers of $20.2 million. As of March 31, 2013, total available cage capital was approximately $285.5 million. The total available cage capital is comprised of markers receivable of $261.5 million and cash, cash chips and non-negotiable chips of $24 million.

I would now like to turn the call over to Mr. Jim Preissler, Director of Asia Entertainment. Jim?

James R. Preissler

Thanks, Bill. For the first four months of 2013, AERL’s Rolling Chip Turnover averaged $1.39 billion per month, giving us a Rolling Chip Turnover in Macau of $5.55 billion as of April 30, a decrease of 22% year-over-year.

With the tightening of credit to junket agents, we are maintaining our Rolling Chip Turnover guidance for our four existing VIP rooms in Macau of $1.5 billion per month subject to monthly fluctuations, which equates to a total of $18 billion for the full year of 2013, potentially comparable with 2012 results.

We believe for the remainder of 2013, our business will remain on a revenue sharing basis. We are maintaining our non-GAAP income guidance for the year ended December 31, 2013 of $60 million to $75 million based on the current and expected performance of existing four VIP rooms in Macau, and does not take into account any possible future expansion or additional VIP gaming rooms.

As you saw earlier this week, we are announcing a non-binding MOU to acquire a room at Le Royal Arc Casino located in Downtown Macau. Upon completion, this will give us our second VIP room in Downtown Macau.

We’ll add SJM as our fourth concessionaire we’re doing business with and provide us with at least additional 500 agents to further expand our reach and market share into the high-end back room market. We’re very excited about this transaction and believe it’ll greatly enhance our position as one of the premier VIP game room operators in Macau.

This completes our prepared remarks. I’d like to turn it over to the operator to begin our Q&A session. Operator?

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) And we’ll take our first question from Steve Altebrando with Sidoti & Company.

Steve T. Altebrando – Sidoti & Co. LLC

Good morning, guys. With respect to the guidance, does the $18 billion include yesterday’s announced acquisition?

James R. Preissler

It does not, Steve.

Steve T. Altebrando – Sidoti & Co. LLC

It does not. Okay. And then, wanted to touch on the commission to the agent, seems to be rising and kind of extrapolating it over the full year and assuming the $18 billion Rolling Chip would – achieving the low end of your net income guidance, we assume a pretty meaningful decline. Is there any particular factors why that would come down?

James R. Preissler

Well, Lam Man can go through the factors on the commission to agents and I’ll talk about the perspective going forward. So Lam Man, why don’t you talk about some of the trends there?

Lam Man Pou

Yeah. For the commission, needs for the commission is not high for this quarter. The key reason behind is we adjust the commission rate to the agent, starting January to compensate the agents for charging them for the hotel and casino service. So you can see on the income statement, we received almost $2.5 million cash element for the share business provider, I mean, for the first Q because of the high win rate. So we pay a higher bonus to those large credit junket agents who participate in the share in the win and losses. Also same as the second half of last year, we have our largest loan market business led by reputed business. All of these contributed to higher commission.

So, I mean, it’s coming for this year, would be almost similar because of the components on behalf of that, but means might be high or lower would be affected by the win rate because of the bonus we pay to the large geographic regions.

James R. Preissler

Okay. So, Steve one of the key things is those cash agents, the mix of the cash agent is hard to protect and going forward versus the credit agents and obviously cash agents get much higher commissions than the claim and credit agents because you’re not providing them a credit line.

Steve T. Altebrando – Sidoti & Co. LLC

Okay. And then, in terms of acquisition if there is any color you can provide in terms of what kind of monthly RCT and if you can provide any color on the seller motivation?

James R. Preissler

Well, the seller motivations we see across the board is similar for all this smaller rooms. It’s typically, these are operators with just a single room, a small amount of cage capital and the inability to get credit launch from the casinos or fully service and utilize their agents. So for them to grow, they either have to raise significant capital or to sell to a larger entity. So that’s what we’re seeing in the [call] going on is that the smaller guys are kind of hitting the feeling of what they can do to service their existing small agent base.

So that’s the typical seller motivation. So they are looking to retain their agents, grow their business and the acquisition looks like a pretty good outcome because now again those agents – they have 500 agents or so. Those agents now get a much higher credit launch for themselves and those agents also have the ability now to bring players to all our existing rooms. So the net result is those agents can once again start to grow their business where before it was a bit existing single room. They were kind of hitting the wall and what they could do. They tapped out their credit line. They tapped out where to bring their clients. So I think that’s really the very typical motivation that we see. Sorry, Steve. What’s the other part of your question?

Steve T. Altebrando – Sidoti & Co. LLC

If you can give any indication of what kind of volume room was there?

James R. Preissler

Yes, so as we disclosed, the excitation is about $2.5 billion. So that’s just a rough indication of the volumes they have been dealing. That’s all we got [so far].

Steve T. Altebrando – Sidoti & Co. LLC

Okay. Thank you.

Operator

We’ll go to our next question from Echo He with Maxim Group.

Echo Y. He – Maxim Group LLC

Hi. Thank you so much for taking my question. On the revenue line, there is a service revenue. Would you just clarify a little bit more how you categorize your revenue into service revenues? And also the SG&A cost is higher and would that be dissimilar, I mean, would that continue in the future, the rest of the quarter?

Lam Man Pou

I mean, for the service income we receive mainly before hand because we pay a lower commission, a little bit lower in the commission to the junket agents. So we will provide demanding service to them and something for this year because it will be more flexible, I mean, for us to deal with the agents. So we assess the commission. And so, on another hand it’s also charged them for the hotel service, restaurant, everything they use. So, I mean, for some of the restaurant service will be held on the SG&A and while the SG&A also be include, I mean, for the first year when compared with last year, because we acquired Bao Li in the second half of the year, so, I guess it’s last year. There was an increase in the management fees and also because of the additional room we also increased the (inaudible) use. So these all contributed to the increase in the SG&A.

Echo Y. He – Maxim Group LLC

The rest of the year are going to be like this or is this just one-time and there’s going to…

Lam Man Pou

I think almost similar. I mean, unless anything we’d be, the acquisition of the new VIP rooms that might affect the SG&A at big.

Echo Y. He – Maxim Group LLC

Okay. You mean similar in terms of dollar amount or similar as a percentage of that?

Lam Man Pou

In the percentage I think.

Echo Y. He – Maxim Group LLC

Percentage, okay. I understand. So just now, Jim, was talking about the motivation of the selling of the acquired company. I am just – why don’t – no more of that situation. Are these company really are facing difficulty growing their company? Why is just they’re facing difficulties to even hold on to their business, is that any motivation on there and then they can’t make it profitable or something, they wanted to sell?

Lam Man Pou

Well, the profitability was not really directed to the – sorry go ahead.

Echo Y. He – Maxim Group LLC

I mean, maybe profitable is not a proper word. Maybe their working capital will turn around and they have some kind of difficulties out there.

Li Chun Ming

Yeah, the typical difficulty they are having is that they have 500 agents that they have grown and cultivated and those agents are trying to – the good agents are trying to grow their business. So if they don’t service the ability for those agents to grow their business, eventually they are going to loose them. So in quantifying that how you want, whether it’s difficulty or some other problem, but the reality is that, it has to continue to grow in order to be able to expand their agent days.

So that means, providing credit lines, that means providing more venues for those agents to bring their players and for a smaller player with a limited amount of capital and inability to tap into significant credit lines. If they can’t raise money on their own, it becomes difficult to do that and that’s the kind of the challenge that many of the smaller guys face, it’s that’s there is lot’s of these standalone single operators out there. And eventually they rather (inaudible) they want to kind of keep their one room business and kind of run at both the candidate. Those derive very good cash flow, don’t get me wrong.

Echo Y. He – Maxim Group LLC

All right, I understand.

Li Chun Ming

But if they want to be able to continue to grow and service and capture more upside, they have to make that decision, that they want to be acquired or do they want to raise difficult money and grow their own business and that decision that every operators needs to make.

Echo Y. He – Maxim Group LLC

So even if they are acquired and becomes the part of your operation, they are still able to maintain their independent operation, right, so they’ll just add this to more our credit line, that’s what you are talking about.

Li Chun Ming

Yeah, well, they are still effectively running the room and responsible for the activities in the room. However, right now, they have more cage capital to work with. So what we do is we go in there as we try to identify who are their best agents and how we can give those agents while the credit lines have helped them grow their business, because where we get leverage and synergy from the acquisition. At the same time now, our existing agents have access to that room as well.

So what we’re really trying to do is, remember we’re buying here – buying a network of agents. We are trying to get out which are those best agents that we can grow and get more leverage on. So that’s effectively what we’re trying to do here and that’s what gives us the synergies. Now structurally, we tried to structure the deal, as we’re basically only paying for the business in that existing room. All that synergy accrues to us not to the acquisition.

Echo Y. He – Maxim Group LLC

I understand. Okay, okay, very clear. Thank you.

Li Chun Ming

Okay.

Operator

And then we’ll now go to with Brad Boyer with Stifel.

Brad J. Boyer – Stifel, Nicolaus & Co., Inc.

Good morning, guys. Jim if you could just clarify going back to the prior question. If we are modeling this out, is 0.414% or kind of in that range as a percent of roll on the SG&A line kind of good run rate level or is there going to be some fluctuation there quarter to quarter?

Lam Man Pou

It is a good run rate however we wanted to point out as we added new rooms. We think we may have some additional expenses. And at the end of the year, we’re going to have some additional expenses from Hong Kong listing. So I think you’re roughly in the right range but it could creep up slightly from there.

Brad J. Boyer – Stifel, Nicolaus & Co., Inc.

Okay great. And then on the Hong Kong listing, is there anything new to add there?

James R. Preissler

No, the bankers and the lawyers are still working on this, actively working on the prospectus. I think we are probably couple of months away before they submit the application perspective. They both have to be submitted at the same time. So we continue to have positive responses from the exchange. So things are progressing nicely on that front, and trying to push it forward as expeditiously as possible. So I know there is lot of work going on behind the screen that you are not necessarily seeing, but still a lot of work done going on behind the scenes.

Brad J. Boyer – Stifel, Nicolaus & Co., Inc.

Okay, that’s great. And then lastly now that the accounts receivable are up pretty sharply quarter-over-quarter, could you just remind us of what was driving that?

Lam Man Pou

With the market are you talking about…

Brad J. Boyer – Stifel, Nicolaus & Co., Inc.

No, just the other accounts receivable, it’s like $15 million this quarter versus like $2 million at year-end?

Lam Man Pou

Yeah, Jim, you go ahead.

James R. Preissler

A lot of it has to be the timing of payments. And remember, we have large expenses for the – we trying to get more clarity on this, but we have the audits, we have two sets of auditors, depending on the timing of that and bunch of other things. We have a lot of issues, so we have been watching that appropriately.

Lam Man Pou

Yeah, for the accounts receivable, increase is mainly because sometimes for the year end, because of the – we need more cash to send probably for the year-end, so we can pick these commission in advance, but for I mean by the end of the first quarter. We didn’t have any – picked any cash in advance from the – and these commission runs from the casino. So these accumulates being as receivables, so that make a difference.

Brad J. Boyer – Stifel, Nicolaus & Co., Inc.

Okay, great. Thanks guys.

Operator

You may now go to (inaudible).

Unidentified Analyst

Good morning guys and congratulations on a decent quarter. And I have got basically a comment and a couple of questions and this is mainly directed to Jim. Jim, I just want to estimate, as you’re aware, I am sure our conversations in the past, how fine has been very short most Chinese companies. And you know we are always open minded and looking for companies that we really think are legitimate. And I got to tell you, this is the story here with Asia Entertainment. If you look at the amount of shares that were bought back in Q1 your continued buying back stock going forward. And I’d say, this is something I really think is being very excited about. I can usually see this company going back to a PV-10, within 12 months easily. And I think people are looking money put money back into the sector, you think in fine and legitimate manner, how its been skeptical is anybody out there, but now I want to ask you, what kind of institutional interest are you seeing rightly in the stock and I also want to ask you if because you don’t have any clients to deal anything with online gaming or that sort of thing in the United States?

James R. Preissler

Thanks John. As far as institutional interest, we are definitely seeing the interest coming back to the Chinese names. It’s a long new hard year and half of trying to keeping your head down, executing and trying to ignore all these external forces, So all we can do is, continue to try to take the light steps on the business and other buyback and the dividend are two examples of that, but we are starting to see some of the institutional interest coming back, because as you know many institutions are dramatically under exposed to the segment of the world economy. So we are seeing the interest of where they can come back and start deploying capital. Now, a lot of that has gone to large cap companies, but we are starting to see some interest now in the small cap companies in the China related space at this point.

So I think a lot of the steps we have taken over the last year and half will pay advantages, because we are starting to get that respect and interest back on these companies and now you can start to see that volume over the last six months or so have slowly steadily improved. We are starting to see some bigger block trades coming through now and again. So I think that’s all paying advantages.

As far as the online gaming, that’s a sticky issue. We have to be careful, because it’s unclear as to where the loss lie, particularly on mainly in China. So we wouldn’t want to be in a situation in anyway where we are not in online gaming and somehow someway, the players where some of them are coming mainly in China, particularly since we are planning at Macaque gap. So I think that’s the one thing we have to be really cognizant of and careful of.

However as we see interesting opportunities, we are always looking at them, both in Macau and elsewhere.

Unidentified Analyst

All right, I appreciate it. Thanks.

Operator

And we will now go to Chris White with Greenstone Value Opportunity Fund.

Chris B. White – Greenstone Capital Management Partners LP

Yeah, congratulations guys on the acquisition. Certainly understand that and the reasons for that, but depending on how you played down with the win rate you can argue whether that’s accretive in here from a free cash flow standpoint and just to how I think about it a little bit. If I give you credit for 50% of your markets receivable is cash, which I think is highly conservative. I’ve got you curving in round of that 2.5 times free cash flow. And this is the acquisition which looks to me depending on how excited I am with the win rate. It looks like it’s around four times. Still very nice pictures, but I would argue it’s differently way more accretive for you from a free cash flow standpoint to be buying back your security in here. And I’d encourage you to continue to be aggressive on that buyback. Do you like the diversification across the transition area and spreading your run rate risk hits up and congratulations for that

Two questions, where are you at with account buyback and second question what if any dilution or would be from the Dual Listing. And I think because we’re getting really close to that point we are within what quarter to of that, I would like a comprehensive answer on the call, with regards to the mechanics of that and any dilution and so I think that would be important. Thanks.

James R. Preissler

Right, I’ll turn over to Hong Kong Listing question, Edward as far as the others as I can remember them the first one we have to do with the buyback which is on-going obviously between the 15 days beyond the quarter to when you report is a blackout period. So we don’t have much to report over the last x number of days from then to now. So that, that there is a blackout period because of the earnings release. So, after that we can go forward with the buyback.

As far as your kind of assessment on the acquisition, the mathematics of the acquisition of that existing room are correct and as I pointed out at the call before, our real synergy comes from obviously growing their existing business but more importantly from us getting leverage in that realm as well.

So, our total contribution of that comes from both parts of – I believe they generate revenue there as well as I believe to help them grow their revenue there. So not to argue your assessment of the accretive of the buyback versus the room, we’re doing both. So, I think the positive thing is that we understand what you’re saying and we’re doing both parts of those. So I don’t think it’s really a trade-off of one versus the other I think the opportunity here is for us to use kind of all the tools that we have. So, with that I’ll pass it off to Edward for a review about the Hong Kong listing.

Edward Chen

For the Hong Kong listing we’re doing I mean like through by introduction, so when I’m going to raise an equity, I mean from the Hong Kong listing.

Chris B. White – Greenstone Capital Management Partners LP

And could you just explain how that works, the mechanics – it would play just a little bit more in depth if you could?

Edward Chen

Okay, so, the thing is I’d say like this – whoever want to trade their shares in Hong Kong conjuncts with the shares at Hong Kong Stock Exchange and we will, I mean initially in the first two months, we will have investment bank working out like a good arbitrage. So the price difference will not exceed 10%.

Chris B. White – Greenstone Capital Management Partners LP

Right, but and I don’t want to bow down the call, but if it’s product introduction my understanding is that the investment bank will take some shares from some holders let’s just say, it’s the insiders and then they will use this years (inaudible).

Lam Man Pou

Yeah they will play with the shares and then with the arbitrage.

Chris B. White – Greenstone Capital Management Partners LP

Right, and then there will be an underlying agreement between who they borrow their shares from and then that will go in and buy their shares on the U.S. market and then delivering them to whoever wait them in the first place. Is that correct?

Edward Chen

Yes, I said it’s one of the alternative, yes.

Chris B. White – Greenstone Capital Management Partners LP

Okay, right and so there is an underlying agreement to deliver those shares back from the investment bank to the original lender of the shares.

Lam Man Pou

Yes, and so the risk is on the investment bank. There is no dilution to AERL and at some point those shares were brought by investment bank will be delivered back to the original holder is that correct?

James R. Preissler

Correct, we’re not going to raise any equity from the listing in Hong Kong, it’s through that was like by introduction.

Chris B. White – Greenstone Capital Management Partners LP

Right okay, I think I understand how it works, I just feel like we’re really close and perhaps more of a defined how we work, for everyone because I feel like it’s perhaps a bit of an overhang right now, but congratulations on everything else and I do appreciate how you listen to us about you had a best use of free cash flow and grow your business and continue to buy back, so I will let someone else get on the call.

James R. Preissler

Okay thanks Chris.

Operator

We will go to (inaudible) with Brookfield Capital Partners.

Unidentified Analyst

Good afternoon guys, congratulations on the quarter. I have a couple of questions, the first being, can you comment at all on, what role you may or may not be playing in the newest market in Manila and I have two follow-ups.

Leong Siak Hung

Yes so when we look at these different markets whether it’s Vietnam, Singapore, Philippines, Korea, it really comes down to what’s the return on capital you could generate there, and the interest of these Mainland Chinese gamblers. So for example a market like Manila they will have a small smattering of Mainland Chinese VIPs that will be interested in going there. Our belief is this is not going to be a very sustained business, they might show off there once a year or maybe once every several years or maybe once in a lifetime, so we don’t really see the sustainability right now for Mainland Chinese to specifically be going to these Philippine VIP rooms. And there is a whole host of reasons, why we think of that, but I think that’s the initial assessment at this stage of the market.

So for us to plug meaningful capital in a market like that at this point, we just won’t get returns of the capital required to generate similar returns that we see in Macau.

And even the healthier markets like Singapore for example where we see slightly higher base of Mainland Chinese VIP gamblers going there, we still don’t see this to commensurate returns on capital and ultimate return on capital that we’d that Macau can provide. So I think that’s the ultimate assessment we need to make is that what do we need to deploy there? What’s our annual return we can make off of that? And is all the effort involved to do so make sense?

So I think for longer term I don’t know if Philippines will really make sense, I mean I think some of those other markets that I mentioned might be more advantage opportunities near term.

Unidentified Analyst

Thank you, and second question is how significant from a macro standpoint is your new relationship with SJM, so putting the actual purchase of what you are doing aside for a second just looking at the relationship on a macro basis, can you add some color to that how you guys feel about that?

Leong Siak Hung

Well from a risk assessment standpoint it is very point to diversify your risk from both the contractual standpoint as well as a statistical standpoint now. Contractually the more relationships we have and the larger our footprint is in Macau, the less risk we have of anything should ever go wrong in anyone of the rooms or anyone of the relationships, so I think that how we manage the risk there.

On statistical standpoint the more you can diversify your risk, the more hands that gets played across these different rooms, the higher our probability is that we’re going to be in a tighter deviation away from the statistical risk on the (inaudible) hands, so that will give us a tighter range around that theoretical 2.9% win rate, so those are the advantage of that, so it’s really portfolio management on both fronts.

Unidentified Analyst

Got it, and my next question and last question is as we continue to interpret the data coming out of Macau as far as their revenues as a whole Macau seems to be obviously very, very strong in the recent past and it seems like the up coming month will be just as strong. Can you comment as to how you see the trend in VIP verse mass because obviously that’s where you guys are focused. There was a lot of chatter about how VIP is slowing and my take on it is, I can’t see how that trend is going to continue for too long based on the overall trend going on in Macau.

Leong Siak Hung

Yeah, so what we’ve seen Frank is that Macau recently has been really driven by mass and premium mass. And a lot of that has to do with pull back across the Macau market of credit for higher gaming due to a variety of reasons is attitude, the mood is pulling back credit, agents not willing grand play, credit to players, players not feeling lucky and not coming to Macau. But the combination of that led to the drop off in VIP.

So if you look at Macau at the end of last year, what we saw was, we saw an expansion of VIP rooms and the expansion of capital, VIP capital. Even if it’s the slight increase in overall volume of the business, meaning the average VIP room last year was head negative same-store sales kind of. And even if you look at the recent numbers out of Galaxy, I believe it maybe Edward or Raymond have the numbers closer to hand, but I believe like Star World was down about 15% year-on-year for VIP and then Galaxy Macau also showed a single digit decline as well.

So we are still seeing those trends happening on kind of a same-store basis in Macau. And you know we have seen recent numbers out of win and others conforming those trends.

So what does this mean going forward? I think the reality is that the Chinese economy is still kind of a three step forward one step back type of economy where you’ll have a couple good months of data and we are still having the bad data trickle in. So it’s not a sustained positive recovery, but it is a long-term sustained improvement. So we are not seeing this big flood of VIP business coming back to Macau quite yet. But we are starting to see that continued steady improvement.

So I think the long-term trend here still is very positive and we think over time that the VIP numbers will continue to improve. But I think the Chinese monthly macro data confirms, what we have been saying all long, is that we have positive data and then one month the data will be negative and we get fair action and the next month is positive again. So all of that will lead to a steady improvement and that’s what we continue to see and that’s what we have been seeing.

Unidentified Analyst

Thank you for your time guys and again congratulations on the quarter and the new partnership with SJM. Thanks.

Operator

We will go to now Mark Giambrone with Barrow Hanley.

Mark Giambrone – Barrow, Hanley, Mewhinney & Strauss LLC

Good morning most of my questions have been answered, but just a couple of quick follow-ups. In terms of sequential improvement in Rolling Chip Turnover as we move forward, what are your expectations there?

Li Chun Ming

So for month over month we are still starting to see, I’m not saying every month will be above the prior month. We are starting to see a positive trend of the months leveling off and slightly growing on a month-to-month basis. So obviously there will be some seasonality in that going forward. But that is the general trend that we are seeing is that we are seeing a slow and steady improvement. So Q1 was better than Q4 and so on.

Mark Giambrone – Barrow, Hanley, Mewhinney & Strauss LLC

Right, and then one question on the dual listing. As we heard you guys have two auditors working on the books now. You have a lot of things happening. Once the dual listing is in place, were those level of expenses stay the same or were they come back down again once you’ve actually completed the listing?

Li Chun Ming

Well, there is a legal banking and some of the high audit cost will come down certainly. I think we will look thicker with the two audit structure for the foreseeable future. But as you know with any offering up front there is a lot of expenses, I mean the legals is very high, you will have to go back and do the historical audits that is very high. So the ongoing normal operational run rate I think will be a downtick from if you are on the offering side.

Mark Giambrone – Barrow, Hanley, Mewhinney & Strauss LLC

Great, I appreciate that thank you.

William Schmitt

Thanks Mark.

Operator

We will go next to Brett Reiss with Janney Montgomery Scott.

Brett Reiss – Janney Montgomery Scott LLC

Good evening, gentlemen.

James R. Preissler

Good morning Brett.

Brett Reiss – Janney Montgomery Scott LLC

You’ve had eight months running the Bao Li gaming that you brought back in September. How is that been going? Has it met your expectations?

James R. Preissler

Yes they and you can see from the contingent liability fees, cut costs on that we reported, one of the things that we are seeing is that, those that room is performing very, very well. And I think this diversification of our agent base turn out to be very, very important in retrospect. Though we are seeing a very good utility of those agents and they are performing really well. And as we get, one of the things we’ve learned is when the high-end market gets weaker, we’re having this diversification in the agent base is that even more critical than it was just to grow the business before, because that really kind of get downside protection, just when the high-end business dries up, it’s really these new agents in the mid-tier business that you really have to rely upon.

Brett Reiss – Janney Montgomery Scott LLC

Right, right. Now some of the surface numbers with Bao Li versus the Le Royal, it seems they were comparable in size in terms of Rolling Chip Turnover. What are the similarities and differences in these two rooms and relative values that you paid for each of them?

Leong Siak Hung

The structures are somewhat similar as far as the acquisition structures. As far as the size of the rooms, you are right they are similar. I think the Asian player bases that we’re seeing that these kind of rooms for, is somewhat similar where it’s not the same as you will see at Galaxy, Star World’s or Galaxy Macau. So it does seem to be a very different type of agent and player base. And I think that’s the advantage that we are attracted to, when we look at these different rooms is that they have different tiers of agents and clients.

So that’s really the key here, and the high-end business is very good and incredibly good when the economy is humming, but it’s really kind of that mid-tier VIP. And when I say mid-tier, these are still big players, these are players of hundreds of thousands of Hong Kong, but those are the types of players that are very sustainable to grow, because those are the players that you can turn into high-tier players down the road.

Brett Reiss – Janney Montgomery Scott LLC

Right, right. Just so I understand it going forward, if Bao Li gaming does not hit their hurdle rate of $2.5 billion Rolling Chip Turnover in September of 2013, that $13 million contingency payment, you don’t have to pay that?

James R. Preissler

So Edward, is that all or nothing on that one?

Edward Chen

Yes, yes, I mean if they do not make the coupon size bid in chips turn over ultimate level. Let’s see, they don’t take only the group employed. There we fit nothing. They have to do coupon sites or better, before they can get $13 million.

Brett Reiss – Janney Montgomery Scott LLC

Right and is this similar arrangement with the Le Royal?

Edward Chen

Yes, yes exactly the same arrangement at Le Royal, and also for that growth one more table, that one that Bao Li within the five tables at the lock, we have six tables with two private rooms.

Brett Reiss – Janney Montgomery Scott LLC

Okay. And one final question, yes, I’m sorry…

William Schmitt

Edward, I want to call that to you, we’ll use a meaningful Bao Li, we’ll use the calendar year so to cut off at December 31.

Edward Chen

12 months, 12 months…

Brett Reiss – Janney Montgomery Scott LLC

I mean January.

Edward Chen

Yeah.

Brett Reiss – Janney Montgomery Scott LLC

Right, right, do you think that as you get bigger and stronger that when you make future acquisitions, a year or two or three down the road that you’ll be able to buy these rooms at lower multiples?

James R. Preissler

What we’re seeing in the market…

Edward Chen

Yeah, continue Jim…

James R. Preissler

What we’re seeing in the market is that the multiple we’re paying is in line with what others are paying including some of the larger promoters out there. So that is just a reality of the market. So I think if our multiple goes up, obviously we didn’t get a better spread on that and maybe, it seems the mix more from cash to equity or something like that. But the reality is the multiples are similar whether it’s very large promoters, buying small promoters or big promoters buying midsize promoters that are private. So we’re talking about private promoters.

Brett Reiss – Janney Montgomery Scott LLC

All right, thank you for answering my questions.

James R. Preissler

The multiples that we paid that was correct okay.

Brett Reiss – Janney Montgomery Scott LLC

Yeah. I’m sorry I cut you off sir, I’d like to hear what you were going to tell…

James R. Preissler

No, no that’s fine. I said the multiples that we paid is only around between two to three times, you look at a $2.5 billion U.S. chips turnover, using the 0.3 to 2.4, I was like EBITDA that you will be getting, like between $7.5 million to $10 million that was like in bottom line and we’re only paying $13 million. So I don’t think I was like it’s over expensive while acquisition. I mean for us I think it’s a very, very reasonable that was like acquisition.

Brett Reiss – Janney Montgomery Scott LLC

Good. Thank you for taking my questions and good to hear your voice, Jim.

James R. Preissler

Thanks, Brett.

Operator

And at this time, we have one remaining question in our question queue. (Operator Instructions) We’ll take our next question from Chris White with Greenstone Value Opportunity Fund.

Chris B. White – Greenstone Capital Management Partners LP

Hey guys, just because no one has really asked that’s why I jump, again if you could give some color on May please, just how May is generally going, I mean we are almost done and if you give us some, what color you feel comfortable here on May? Thanks.

James R. Preissler

Similar as in April.

Chris B. White – Greenstone Capital Management Partners LP

Okay.

Operator

And that conclude our question-and-answer session. I will be glad to turn the call back to our speakers’ for any closing comments. Thank you.

James R. Preissler

Thank you everyone for attending today’s conference call and your continued interest in AERL. We’re out of time, and if we didn’t get your questions, as always we will be happy to follow-up with you either by phone or e-mail. Thanks everyone. Have a good day. Bye.

Operator

And ladies and gentlemen, that does conclude today’s conference call. Thank you for your participation.

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