Entertainment Gaming Asia CEO Discusses Q1 2011 Results - Earnings Call Transcript

May.16.11 | About: Entertainment Gaming (EGT)

Entertainment Gaming Asia Inc. (NASDAQ:EGT)

Q1 2011 Earnings Call

May 16, 2011 8:30 am ET

Executives

Traci Mangini – Senior Vice President, Corporate Finance

Clarence (Yuk Man) Chung – Chairman and Chief Executive Officer

Andy (Kin Ming) Tsui – Chief Accounting Officer

Analysts

Paul Sonz – Sonz Partners

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Entertainment Gaming Asia Incorporated First Quarter 2011 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded on Monday, May 16, 2011.

I would now like to turn the conference over to Traci Mangini, Entertainment Gaming Asia Incorporated. Please proceed.

Traci Mangini

Thank you, operator, and good morning everyone. I’m Traci Mangini, Senior Vice President, Corporate Finance for Entertainment Gaming Asia. With me today on the call are Clarence Chung, Chairman and Chief Executive Officer; and Andy Tsui, Chief Accounting Officer.

Now before we start, please let me review our Safe Harbor Statement. Some of the statements that the company will make on this conference call such as statements of the company’s plans and expectations are forward-looking. While forward-looking statements reflect the company’s good faith beliefs, they are not guarantees of future performance and involve risks and uncertainties. The company’s actual results could differ materially from those discussed on this phone call.

Some of these risks and uncertainties are described in today’s news announcement and in the company’s filings with the Securities and Exchange Commission, including the company’s reports on Forms 8-K, 10-K and 10-Q. Entertainment Gaming Asia assumes no obligation to publicly update or revise any forward-looking statement.

Now, the agenda for today’s call will be as follows. First, Clarence will discuss the highlights of our 2011 first quarter financial performance and corporate developments. Following that, Andy will review in more detail our financial results for the first quarter. Clarence will then conclude our prepared remarks with an update on our growth plans for our gaming operation including details on our new casino project announced just this morning. We will then be pleased to take your questions.

With that, let me turn the call over to Clarence Chung. Clarence?

Clarence (Yuk Man) Chung

Thank you, Traci, and good morning, everyone. With the successful refocusing of our business model and greatly improved operating results, we entered 2011 a transformed company. It is evident by our strong financial performance for the first quarter achieved while we have made progress on our growth strategies to develop and operate regional casinos in the emerging and dynamic markets of Indochina.

Before we discuss the details of our growth plans, I would like to take this opportunity to highlight some of our key financial results during the first quarter of 2011 and recent corporate development.

Total gaming participation revenues for the first quarter of 2011 was a record $4.2 million, up 47% from the same period last year. This strong growth was driven by improved consolidated average net win of $134 per seat and a slightly higher installed gaming machine base.

Cash SG&A was $1.1 million for the quarter, down 22% from the same period last year and record quarterly low for the company since we began implementing our cost reduction strategy.

Adjusted EBITDA was $3 million for the first quarter, which was more than double the $1.3 million achieved in the same period last year and represents a solid annualized EBITDA run rate for the company. Net income was nearly $700,000 or $0.01 per share, which represented the second quarter of positive GAAP earnings since the company effected its new business model in September 2007.

We have significantly improved our cash flows from operations, which has enabled us to continue to build our cash position, with cash and cash equivalents reaching $12.5 million as of March 31, 2011 compared to $10.2 million as of December 31, 2010. We have continued to build our cash positions from cash flows from operations so far in the second quarter, with cash and cash equivalents reaching approximately $13 million as of May 6, 2011.

As you can see, we’ve made significant improvement in our financial performance and have accomplished these while executing on our casino development plan. In addition to making progress in the development of our previously announced Kampot Project, I’m pleased to announce today another new strategic project that we believe will drive near-term return and long-term growth for the company. We will discuss this event in a moment. But first I’d like to turn the call over to Andy to review the financial results in more detail. Andy?

Andy (Kin Ming) Tsui

Thank you, Clary and good morning everyone. Before we discuss the details of the first quarter 2011 financial result please note that we have reclassified our reported operating segments into two divisions. Any operations, which include our gaming participation business as future casino development operations and other products, which consists of the operating divisions formerly called table games and non-gaming products. These changes do not reflect any change in focus of the company. And all new reporting segment information has been applied with respectively as previously discussed.

Total revenue for the first quarter of 2011 was $6.2 million up 43% compared to $4.4 million in the first quarter of 2010. Revenue growth was primary driven by our gaming participation operation as well as improvement in our other product operation. Gaming participation revenue was $4.2 million for the first quarter of 2011 up G% compared to $2.8 million in the first quarter of 2010 driven by strong improvement in the average net wins and a higher installed machine base.

Consolidated average daily net win per unit for the quarter improved to $134, up 25% from $107 in the first quarter of 2010. Average net win per day figures exclude EGM operating under a new venue’s soft launch or when a venue’s revenue recognition on a cash rather than accrual basis.

For the first quarter of 2011, 166 seats were excluded from the net win calculation. Were these seats included in the calculation, average consolidated net win per day for this period would have been $124.

Our installed base of electronic gaming machine seats in the operations, as of March 31, 2011, was 1,638 seats, an increase of 18% from 1,084 seats as of March 31, 2010.

Gaming participation revenue from Cambodia, which consists primarily of our operations at NagaWorld, increased to approximately $3.4 million for the first quarter of 2011, up [15%] from $2 million in the first quarter of 2010, reflecting strong average net win per unit and a higher installed machine base at NagaWorld.

Average net win per unit in Cambodia was $224 for the first quarter of 2011, up 15% from $194 in the first quarter of 2010. Our installed base of machine seats in operation in Cambodia, as of March 31, 2011, was 726, which includes 60 seats at one venue during a soft open period. This represent a increase of 32% from 551 seats as of March 31, 2010.

In the Philippines, gaming participation revenue for the first quarter of 2011 was approximately $805,000, down 3% from the first quarter of 2010 level of $833,000. The first quarter of 2011 revenue was reduced by approximately $52,000 as a result of deferred revenue reorganization for one venue with 106 EGM seats in the Philippines as collection from this venue is not yet reasonably assure. However, our EGMs remain in operation at this venue, as we are actively engaging discussions with the venue owner to reach an amicable solution.

Average net wins for the Philippines was $58 for the first quarter of 2011, up 4% from $56 in the first quarter of 2010. Our installed base of machines seat in operations in the Philippines was 912 seats as of March 31, 2011, an increase of 9% from 833 seats as of March 31, 2010.

Our other products division, mainly the manufacture and sale of gaming chips and plaques and non-gaming products such as automotive components contribute approximately $2.1 million revenue to the first quarter of 2011 up from $1.5 million in the year ago period, driven primarily by the improving economy and automotive industry in Australia.

Cash SG&A expenses for the first quarter of 2011 was $1.1 million, down 22% from the prior period year. This strong revenue and strict cost control we stock in adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, and amortization and non-cash expenses up $3 million for the first quarter of 2011, which compared to $1.3 million in the 2010 first quarter.

Our consolidated net income for the first quarter of 2011 was $692,000 or $0.01 per share on a weighted average diluted share count of 119 million shares. This compared to a net loss for the first quarter of 2010 of $1.7 million or $0.01 per share on a weighted average diluted shares count up 150 million shares.

Turning to the balance sheet, as of March 31, 2011, we have total of $12.5 million in cash and cash equivalents. This compares to $10.2 million as of December 31, 2010. The increase in cash balance was a result of strong cash flow from gaming, participation, operation, partly offset by capital expenditure for gaming machine purchased to enhance our participation in business operations.

We have $9.2 million in debt as of March 31, 2011. This debt is held in form of an unsecured promissory note issued to a larger shareholder EGT Entertainment Holding Limited. A wholly-owned subsidiary of Melco International, this note has been amended under safe note to three promissory note act, last year further on maintenance will began making principal and interest payment in July 2011 an approximate amount of $530,000 per month, for a period of 18 months.

I will now turn the call back to Clarence to discuss our casino development plan, Clarence?

Clarence (Yuk Man) Chung

Thank you, Andy. I will focus business operations and streamline how structure has resulted in solid recurring positive cash flow from operations, improved operating efficiency and a growing cash position. This enables us to invest in our existing operations and pursue our growth opportunity, primarily these development and operations of casinos under the Dreamworld brand in the emerging gaming markets of Indochina.

We are making solid progress on our casino development brand. On March 8, 2011 we announced plans to develop and operate a casino with table games, as well as electronic gaming machines in the Kampong Province of Cambodia, statistically locate near the Vietnam border. We have secured the casino license for these projects and subject to receiving the remaining government approval. We are scheduled to break around in June with constructions of the initial phase completed by the end of this year.

We are also very pleased to announce today another new casino development project in the Pailin Province in Cambodia near the Thailand border. Pailin is located on a growing trades root with solid infrastructure between Cambodia and Thailand. It is approximately four hours from Phnom Penh and three hours from Bangkok by car. Pailin is on the northwestern border of Cambodia far away from the current conflict area of the northern Cambodia Thailand border.

The Pailin project will be owned by a joint venture company incorporated in Cambodia for the sole purpose of operating the casinos, to be named Dreamworld Casino Pailin. We and the local partner will share 55% and 45% respectively of the cash flow generated from these operations. The initial phase of the Dreamworld Casino Pailin will consist of a casino with an estimated 23 table games and 40 gaming machine seats. It is expected to open in the second quarter of 2012 subject to the timely issuance of the required gaming license and the construction permit. It will be one of the five existing casinos in the area and the closest to the immigration border checkpoint. Our target market will be the mark market and premium players’ from the major nearby cities in the region.

The initial phase of the casino will be constructed on land owned by the local partner and will be approximately 15,000 square feet in size. The local partners also owns the adjacent lands for which the JVC would potentially utilize at the future stage to development additional bases, such additional bases are currently intended. We include a expanded casino operations and complementary facilities such as hotel rooms, bar, and other entertainment amenities and towards significantly expand the footprint of the projects to over 170,000 square feet.

Under the terms of the agreement, this JVC will apply for it’s own casino license and the local partners release for the JVCs lands for a period of 20 years for an annuity of $1.

We will fund the development constructions and operations of the casino on the land. We will have exclusive management rising console over the development in operations of the casino. A management and voting controlled over the JVC. The initial project term is 20 years with renewal option. Capital expenditures for the initial phase of the Pailin project, which primarily includes the development and construction of the facility and the gaming equipments and project it to be approximately $2 million. We will fund the capital expenditure for the initial phase from cash on hand.

In addition, we have an attractive pipeline of additional potential casino and gaming project in the region. We are in active discussions on these strategic expansion project and we look forward to providing more details on our casino development operation as our plans materialize.

In summary, we believe we are making progress in executing on our strategic growth initiatives to develop and operate regional casinos under the Dreamworld brand in the Indo China region. I believe our Kampot and Pailin projects are strategic steps in achieving these objectives and to provide the potential for near-term earnings and long-term growth while further establishing our footprint and the Dreamworld brand in our target markets.

With solid recurring cash flow generations and a growing cash balance, we believe we are well positioned to execute on our existing plans and pursue additional casino development projects. We remained in active negotiations on new gaming projects in the region to selectively build a solid pipeline of opportunities to achieve our goal of becoming a leading regional casino operator in the growing market of Indo China.

Lets now open up the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Jim Crabbe, he is a Private Investor. Please proceed with your question.

Unidentified Analyst

Good morning. Clarence and Andy perhaps you’d mentioned that there was about $1.2 million, I believe this is what you said of CapEx in the first quarter of this year. Is that correct?

Andy (Kin Ming) Tsui

No, no. I think we said, we have Cash SG&A of $1.1 million for a quarter and we did not specifically…

Unidentified Analyst

You said what? I’m sorry, Andy you said what?

Andy (Kin Ming) Tsui

We said Cash SG&A was $1.1 million for the quarter. We didn’t specifically mention about the CapEx for the quarter in our call.

Unidentified Analyst

Well, you had mentioned that there was $12.5 million in cash at the end of March and on the 6th of May which looking at the rate that you’ve been building cash there was a you had an additional $500,000. So, that would have been some where between, close to million dollars of CapEx and some more it looks like. Is that correct?

Andy (Kin Ming) Tsui

Yes, yes, we have roughly running about $1 million per month EBITDA. So we do have incurred some cap expenditure from purchase of new machines and also for our casino project development during the March quarter end as well as the June 6th as we’ve recorded.

Unidentified Analyst

Okay. So, that isn’t actually construction on the Kampot Project, I mean do you capitalize like legal fees and so on to get those kind of projects up in running?

Andy (Kin Ming) Tsui

Yes, all the project unit cost are being capitalized at the moment that’s correct.

Unidentified Analyst

Okay. And secondly, may be I mean I think I got this right there were $3 million of non-cash expenses in the first quarter?

Andy (Kin Ming) Tsui

Do you mean including depreciations and another amortization expenses for the quarter?

Unidentified Analyst

Is the depreciation running about, something just over $2 million?

Andy (Kin Ming) Tsui

Yes correct

Unidentified Analyst

And, so there were about $3 million in the quarter. So there was about a $1 million in the quarter of additional non-cash expenses. Can you give us any kind of an idea what those were? I thought that stock expenses and so on weren’t those taken in the fourth quarter last year?

Andy (Kin Ming) Tsui

For the employee stock option brands and so on.

Clarence (Yuk Man) Chung

Jim, after we did the so-called cost reorganization. I mean we reevaluated fixed asset primary we created a new item called Casino contract that being amplified during the first quarter as well. So that’s part of our amount of on cash expenses.

Unidentified Analyst

I see. Correct me if I’m – how do you handle that in relation to, that’s a reduction of cash earnings, right?

Clarence (Yuk Man) Chung

No.

Unidentified Analyst

That’s a reduction of operating income?

Clarence (Yuk Man) Chung

Yes. Correct.

Unidentified Analyst

Okay. Thanks. The other thing, Clarence one further question, you on the last corporate presentation that I saw you had mentioned three projects. One was a project that we talked about last fall that was an integrated resource. I assume that’s not what the one we announced this morning is. I mean it sounds like it could be an integrated result over some period of time but I assume that’s not the project that you’ve alluded to this morning.

Clarence (Yuk Man) Chung

Well, I must say that obviously we are working on it as said. A number of projects and we are building up our project pipeline and up to this point in time there were, it is mature enough for us to get more details for the Kampot as well as the Pailin dug in today. So in other words I did mention in the earnings call that we’re still working on the number of projects, which I think is very exciting. So indeed well that firm part of our total pipeline project.

Unidentified Analyst

Okay. You had mentioned those three projects and I assume that this is one of the three that you had mentioned in the present that was listed in the presentation, well I will say that, well.

Clarence (Yuk Man) Chung

Yes. I think previously we have a couple mentioned before but indeed apart from Kampot we announced another one, Pailin today.

Unidentified Analyst

Yes. Now, is the one that you announced today, the same one that you suggested last fall was underway but that is not yet been announced. Is this that same project or is this a different project and is that one still underway?

Clarence (Yuk Man) Chung

The one that I must, obviously all I can say is that is the Pailin is not exactly the same as the one that we mentioned that in fourth quarter and the Pailin once is arising, we first initiate and discussions and negotiate during the year. And then, in fact, there are other projects that we're still actively pursuing.

Unidentified Analyst

Thank you.

Operator

Thank you, Mr. Crabbe. And our next question comes from the line of Paul Sonz from Sonz Partners. Please proceed with your questions.

Paul Sonz – Sonz Partners

Good evening, or good morning.

Clarence (Yuk Man) Chung

Hi, Paul.

Paul Sonz – Sonz Partners

Hi, three questions and just for clarification the project that we talked about last October where we discussed that it would be weeks, months before it got announced. Is that still in the works? And under discussion or is that significantly changed or been dropped?

Clarence (Yuk Man) Chung

Yes, I remember that and well, on that I can confirm that we’re still working on it and in fact I still consider that one is a very exciting one but it take unfortunately it take longer than the I expected, but on the other hand I think we’re still progressing in the right directions and actively pursuing.

Paul Sonz – Sonz Partners

Good. The second question then would be, does that mean that the project, and I hope I pronounce this correctly Takeo is that still on hold pending the resolution of the other opportunities you have?

Clarence (Yuk Man) Chung

Yeah, I would say that, well now that we have kind of build up our brand and the good will in the market and in that particular region. I think we encounter more and more even more extracted project especially from a near-term earnings and our return to expect it. So in that case well, I still consider Takeo is a attractive project but having limited resources in terms of cash et cetera, then obviously we have to it’s a happy problem to us but then we have to attach the priorities of developing these project. So indeed waiting on the various aspects and the projects that we have on hand. I think well we feel that and choose to develop more mature projects like Kampot and Pailin then obviously well if we have a additional resources et cetera we will certainly roll out the Kampot Project as well.

Paul Sonz – Sonz Partners

Okay. Could you give a quick update on your assets in Australia, the Dolphin asset?

Clarence (Yuk Man) Chung

Well, in fact they are making solid progress. And in fact we are, on the one hand, restructure the organizations and indeed there is relatively autopilot and they are developing in terms of the new market for their non-gaming product, and in particular, also for the gaming product like the chips and the plaques we are making good progress in terms of, one, supplying to our existing customers, and also looking into new market and new customers. I’m going to say that they’re at least on its own right now. Dolphin was self-contained and they are cash split even from themselves. So in this we do not worry very much about or make additional fundings to support the operations down in (inaudible). And in fact we are actively trying to expand the market shares, both in the non-gaming and gaming side, so that they can also well create additional values to further growth.

Paul Sonz – Sonz Partners

All right. At the present time they are cash break even. You hope to develop new projects that in the not too distinct future will help make them a positive contributor?

Clarence (Yuk Man) Chung

Correct.

Paul Sonz – Sonz Partners

Last question. You mentioned that in the new project, I think it’s northwest of Thailand on the boarder where the northwest Cambodia...

Clarence (Yuk Man) Chung

Yes (inaudible)

Paul Sonz – Sonz Partners

You mentioned that there were multiple other casinos in that region. Could give us a little bit clear picture of the competitive landscape you’re going to be facing there, what the other, how big the other casinos are, what they are like in someway, or at some point if you could put pictures on the website of both what you hope to do there and what the others look like, it would be very useful to us here in the States to try to understand better the market that you are after and what your competition is?

Clarence (Yuk Man) Chung

Right, well we will seriously consider that (inaudible) Paul, and in fact there are a couple of other existing casinos and I must say that well, they are not the usual brand that we understand. So in other words, they are relatively well managed by the brand or the individuals that we do not normally come across. And, so in that case their results are (inaudible) and is non-profit. So unfortunately we cannot get those proper informations and a lot of those information are relative from type of sources, which I don’t think I would be able to share because it may not be correct. But having said that, well we do see the traffic and also in some of the casinos, especially those closer to the border gate area, those are fairly busy both day and night, and that’s why the location is very important and our Pailin Project is right besides the border gate. So in other word, we will be the first casino after the border project.

And then for the other, well, there are [existing] four, five, but then only one is well beside us. And then the other two or three are fairly distant, well in a way that probably would take a minute or two minutes by car, but then it is away from the border entrance. So in that case we have the advantage right next to the border gate and to capture the traffic from the border. And in fact the other casinos, well, in generally they are not as big as you can imagine in other integrated results. They are in the range of 20 or 30 tables and within 50 slot machines. So very similar size of what we are planning to do at Phase 1.

Paul Sonz – Sonz Partners

Right. I see. And you said that you said three hours from Bangkok?

Clarence (Yuk Man) Chung

Correct.

Paul Sonz – Sonz Partners

By car? Okay. And four hours from (inaudible).

Clarence (Yuk Man) Chung

Yes.

Paul Sonz – Sonz Partners

Okay. All right. And what was the reason that you felt that the region could support another casino? When you visit the other casinos, are they packed, what is the reason you feel that you will be able to, the regional support still another casino there and that you will get your share of the business?

Clarence (Yuk Man) Chung

Well, I would say, it is the combination of both. That is probably we think we are professionally managed and in deed we have proven that using a more competitive environment and landscape well we can expand the market as well as take all well probably, if I may probably take certain of our competitors market share. And in that case, well the other case also as well, the other casinos, well, I am not saying that they are not good, well, what I meant to say that, but having said that well, I think well, we can be on the one hand on the hardware or on the hardware side we can build a faster casino, and also from a service and from a casino opening perspective where we definitely can bring in new ideas and music so that to enhance the product offering. With that, I think well there are fairly good chance that we can at least capture a fair share if not higher, the market.

Paul Sonz – Sonz Partners

And then one last question, Ed when you’re talking about the win per day on average per machine, you have the exclusion of the machines that are in the casino that’s still having it’s continuing soft opening and then machines that are being paid on a cash basis versus accrual. Could you explain that a little bit more that the subject, I think it was the Grand Golden that has won it’s on soft opening, it’s been on soft open out for quite sometime and I wonder if you could give us a little bit more detail about what’s going on there and why you are excluding these machines from the average win per day?

Edmond Choi

Sure. Well, why don’t I just will deal with the latter part of your question and then Andy can sort of explain a little bit. The wins per unit per day, that income, well in fact Grand Golden it’s a, we just per machines into about 60 machines into the casinos and in fact it is a joint venture partner between two partners. And I think they from a casino perspective, they are still working on some of the fine finishing of the casinos and that’s why and they also want to pick a good day for the grand opening. And in fact well to them whether or not it’s a (inaudible) to them doesn’t really mean a lot except well that it’s a grand opening thing, because they have been opened and operating and for most of the casino and hotel properties for a couple of months and for us it’s well.

In terms of the WD, this is what we have expected because that area indeed is more table games driven and in fact that we do not expect a very high WD. But having said that, all the machines were using it on the warehouse. So we prefer that the machines earn less than $20, $30 is better than zero. So that’s the logic behind of putting the machines in them. In terms of the calculations and numbers may be Andy can supplement.

Andy (Kin Ming) Tsui

Hi, Paul, this is Andy. I think in the past had internally practices with some new gaming open, they have generally a couple of months of trail period, they are not really happy when opening and inviting the customer. So in the past what we’ve done is to refer the calculation for those venue until they officially have a opening ceremony or some opening party, so that they will invite more customer to visit their venue. So that’s being the practice for us to calculate for Phnom Penh as well as Cambodia in the past. So this being consistent in the past.

Paul Sonz – Sonz Partners

One thought I just had as you were talking, the SG&A is I think for this quarter was $1.1 million which is significantly below what you’ve achieved in the past and I just wondered is that sustainable to maintain your SG&A at $1.1 million or is that sort of an outlier that its got to go up after this?

Andy (Kin Ming) Tsui

It should be a fairly consistent for probably three to six month period. I think we’re running a range between $1.1 million to $1.3 million, there is some time fluctuation between quarter-to-quarter, but the range of 1.1 should be part of the, kind of a standard for our quarterly run rate now. We’ve been running that over the past two quarters.

Paul Sonz – Sonz Partners

That is excellent. And then the last thing is, now that you’ve had time to have, at least some time to the operating cycle, is there going to be any seasonal fluctuations in your results, do you see any seasonality in the gaming results?

Clarence (Yuk Man) Chung

Well, I think right now we do not see a major seasonal impact, to be honest, but obviously there might be variations between weeks or even between months. But then, on a quarterly basis, I think a couple of quarters, well, we do expect that and experience that the WD is quite steady up, except for, maybe there are some major jackpots which has been dropped for that month or two that may have a major impact. Other than that I think it’s not too fluctuate from our experience.

Paul Sonz – Sonz Partners

All right. Well, then, thank you very much. And I look forward to hearing more plans when you can announce them for your pipeline.

Traci Mangini

Thank you.

Clarence (Yuk Man) Chung

We will give a call.

Operator

Thank you, sir. (Operator Instructions) And we now have a follow-up question from Jim Crabbe, a Private Investor. Please proceed.

Unidentified Analyst

First of all I was curious about, in both of the two last projects that you’ve announced you’ve announced it with a partner. We are going to be operating the casinos. What did make more economic sense, I mean, given the amount of split to try to buy the properties or is that are the properties not available? I mean, rather than to run the business as a joint venture with someone else or are these people that we are running on with, key people in terms of getting licenses or what’s [that]? In the Takeo Project, in other words, we haven’t heard at least of any partner and yet the last two projects you’ve announced have included partners. So could you give us some clarity as to why you have partners? And the other question is, and Clarence I’d asked this question before and I want to ask it as openly as I can. When you go into an area and you decide that you want to be involved in a project in that area, you have to have some kind of an idea of what’s going on in that area with other vendors, with other casino operators. And you’ve said in the past that 25% seems to be your threshold of where you’re willing to go in and put up capital. And yet when the checking that I do, the things that I think I’ve been able to find out and I can’t certainly be as a precise as you are and coming to these conclusions, but the project returns don’t look like anything near 25%. And I’m just trying to figure out what, if you’re trying to build a model and you tell us you are going to put in 20 tables, we got to have a number, some kind of number we can plug in. And if you’re going to put in slot machines, some kind of an idea of what’s going on in each of these areas slot wise. So could you give us a little bit color on that, color on the kind of business it takes to get you interested and the reason for having partners in these projects? And that’s my last question.

Clarence (Yuk Man) Chung

Okay. Thank you, Jim. Well, I think, first of all let’s deal with your first question about Pailin. Well my sense is, well, in fact the short answer is it depends on the individual project. But in the last two, namely the Kampot and the Pailin, so happen that the land [there] strategic and in that case it would not be able for us to get the piece of land or to get a total in that particular market without partnering with a partner who puts us in a very strategic location.

For instance, the Kampot one again is the first casino from the border from the Vietnam side and is relatively a small piece of land. And this one that again has a very strategic location and it causes less than $2 million for the total project or even less. But for the Pailin one, as I mentioned, and maybe a small thing described in the separate press release today, the Phase 1 is just the first part of the project and well indeed, well we are also eyeing on a much larger potential development land area next to our initial place. In other words I think again for this major part of land, which amount to 270,000 square feet of development that probably again is though strategically located and in fact, well, you have to kind of well (inaudible) the land owner for this particular project and that’s why we have a partner as well.

Unidentified Analyst

I would say, but wouldn’t it, I mean, if you are giving up 45% of the net, if you win it by yourself on another piece of land you could do 45% less business theoretically or some number about like that and still wind up with the same amount of bottom line for EGT. So are there further considerations you might be or is this just a fact of life that if you want to do business in their territory, you pay somebody who is local in the territory?

Clarence (Yuk Man) Chung

Well, I must say that Jim, well, obviously, yes it is, theoretically you can say that. But having said that you have to look at the local situation whereby whether or not they exist and other replaceable piece of land. And indeed, well, in the Pailin case well, the answer is no. So I would say that, yes, well I think it is not strict sign, but somehow it is combinations of a (inaudible) in terms of dealing with Pizza and particular well partnership and locations and considerations.

Unidentified Analyst

Okay.

Clarence (Yuk Man) Chung

Where as on the returns, yes, where as on your second question (inaudible) the returns, obviously we do have our own model, and well, without reviewing the details that comes in with again as you know those assumptions maybe wrong and they maybe right, but again it’s fairly difficult to sell up. So, in terms of from our perspective and from the Board considerations perspective, well we are trying to work out what is the returns, which is satisfying for us to go into that particular market. And obviously our minimum hurdle rate is 25% was sometimes and we could well achieve higher percent and obviously we prove also that for instance in the NagaWorld situation, our returns is significantly higher and this was old rate and we wanted to replicate this. And, well, that’s why to answer also for both question, well, whether or not is also a objective, well pick and choose them all the time. This project, we think got even higher short-term returns to us, that’s why we will go for the Kampong and the Pailin markets for the time being.

Unidentified Analyst

Okay. Thank you. And then maybe the reasons for going into particular area, your hurdle rates there, they don’t seem to me to be 25%, they seem to me to be a lot higher, and I'm just – can you give us any color on that or is that…

Clarence (Yuk Man) Chung

Well, I'm going to say that’s well, minimum is 25% and I did not say Kampong and Pailin is 25% from our calculations, but that’s the minimum and as far as Naga is concerned or probably over 100% or more. So well, again, I think that’s also the challenge, but also the excitement of this market and indeed, well we probably have confidence to say that one we develop our Grand team, which is very solid Grand team and also we have developed our brands. So that’s again, as I mentioned before, we can execute in this environment externally and also in a way that we have build our brand so that people come to us for projects and that’s why we have to (inaudible) to do a little bit more pick and choose, in terms of directing our projects. And that’s indeed, I think very helpful in terms building the value for the company in the long-term.

Unidentified Analyst

Lastly, do you have any kind of an update on the lawsuit, that’s going on, that we’ve read about?

Clarence (Yuk Man) Chung

(inaudible) I think we haven’t got any further update apart from what we have disclosed previously, so in this well, that’s the same situations have to be formed.

Unidentified Analyst

Okay.

Operator

Thank you. Moving on our next question is a follow-up by Paul Sonz from Sonz Partners. Please proceed with your question.

Paul Sonz – Sonz Partners.

Just a quick follow-up, I wanted to ask you about the turns of the partnership, it’s a 55%, 45% split you’re putting up, they’re putting up the land, you’re putting up the cash. If this works out, so that you do continue to develop the project and it expands from 15,000 square feet to, I think you said, you can go as high as 170,000 square feet. As the development continues, does the split remain the same?

Clarence (Yuk Man) Chung

It is.

Paul Sonz – Sonz Partners.

I’m sorry. I didn’t hear that.

Clarence (Yuk Man) Chung

It is the same.

Paul Sonz – Sonz Partners.

So, in other words, even if you put in significantly more capital as you expand the footprint, the split would remain the same?

Andy (Kin Ming) Tsui

Yes. That’s correct. But having said that though, Paul, well indeed we are developing that in phases, in other words well, we can [pile] the earnings. So the total cash flows, net total cash flows from our perspective do not need to be a lump sum because we are using the cash flow and then we can be in that.

Paul Sonz – Sonz Partners.

Yes. I understand that you can use the cash flow for the further development. I want it. Soo in a sense if you were to develop the project, would the development cost come out of your 55% and they got the 45%. In other words if you generated $1 million and you wanted to expand the project, would they take their $450,000 cash and take that to the bank while you were responsible to protect your $550,000 and using that for the capital improvements to expand the footprint or they would be responsible also for their share of the other development costs?

Andy (Kin Ming) Tsui

In this case, we will be. We would be.

Paul Sonz – Sonz Partners.

All right, yes. Good. That’s what I need this to know. Thank you.

Clarence (Yuk Man) Chung

Thank you.

Operator

Thank you. There are no further questions from our audience. Mr. Chung, I will turn the call back to you. Please continue with your presentation or closing remarks.

Clarence (Yuk Man) Chung

Thank you, operator. We would like to thank you, our shareholders, for their ongoing support. We look forward to updating you on our progress in the near future. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for you participation and ask that you please disconnect your lines. Thank you.

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