\n\u003cp style\u003d\"margin:0in 0in 0pt\"\>$4.00\u003cb\>\u003c/b\>\u003c/p\>\u003c/td\>\u003c/tr\>\n\u003ctr\>\n\u003ctd style\u003d\"border-right:windowtext 1pt solid;padding-right:5.4pt;border-top:rgb(236,233,216);padding-left:5.4pt;padding-bottom:0in;border-left:windowtext 1pt solid;width:239.4pt;padding-top:0in;border-bottom:windowtext 1pt solid;background-color:transparent\" valign\u003d\"top\" width\u003d\"319\"\>\n\u003cp style\u003d\"margin:0in 0in 0pt\"\>Fully Diluted Shares\u003c/p\>\u003c/td\>\n\u003ctd style\u003d\"border-right:windowtext 1pt solid;padding-right:5.4pt;border-top:rgb(236,233,216);padding-left:5.4pt;padding-bottom:0in;border-left:rgb(236,233,216);width:81pt;padding-top:0in;border-bottom:windowtext 1pt solid;background-color:transparent\" valign\u003d\"top\" width\u003d\"108\"\>\n\u003cp style\u003d\"margin:0in 0in 0pt\"\>178M\u003cb\>\u003c/b\>\u003c/p\>\u003c/td\>\u003c/tr\>\n\u003ctr\>\n\u003ctd style\u003d\"border-right:windowtext 1pt solid;padding-right:5.4pt;border-top:rgb(236,233,216);padding-left:5.4pt;padding-bottom:0in;border-left:windowtext 1pt solid;width:239.4pt;padding-top:0in;border-bottom:windowtext 1pt solid;background-color:transparent\" valign\u003d\"top\" width\u003d\"319\"\>\n\u003cp style\u003d\"margin:0in 0in 0pt\"\>Net Cash (after pending warrant exercise)\u003c/p\>\u003c/td\>\n\u003ctd style\u003d\"border-right:windowtext 1pt solid;padding-right:5.4pt;border-top:rgb(236,233,216);padding-left:5.4pt;padding-bottom:0in;border-left:rgb(236,233,216);width:81pt;padding-top:0in;border-bottom:windowtext 1pt solid;background-color:transparent\" valign\u003d\"top\" width\u003d\"108\"\>\n\u003cp style\u003d\"margin:0in 0in 0pt\"\>$65M\u003c/p\>\u003c/td\>\u003c/tr\>\n\u003ctr\>\n\u003ctd style\u003d\"border-right:windowtext 1pt solid;padding-right:5.4pt;border-top:rgb(236,233,216);padding-left:5.4pt;padding-bottom:0in;border-left:windowtext 1pt solid;width:239.4pt;padding-top:0in;border-bottom:windowtext 1pt solid;background-color:transparent\" valign\u003d\"top\" width\u003d\"319\"\>",1] ); "> Seeking Alpha
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Price per share (11/29/07)

$4.00

Fully Diluted Shares

178M

Net Cash (after pending warrant exercise)

$65M

Enterprise Value

$647M

EV/EBITDA 2008E

20.1x

EV/EBITDA 2009E

7.1x

Company Description

EGT (NASDAQ:EGT) was recently spun-out of Melco (NASDAQ:MPEL), one of the six licensees of Macau. EGT fills the need of meeting the heightened demand for small format casino venues throughout Asia. EGT provides a comprehensive turn-key solution to 3, 4 and 5 star hotels and other well-located venues that seek entry into the casino gaming market. EGT assists with the licensing process for the property and owner, casino design, construction management, slot and game floor design layout, purchases the machines and systems from top manufacturers (IGT, Aristocrat, Bally, Melco, etc.) for the venue (EGT retains ownership), installs the gaming machines and systems, and provides on-site maintenance. The company currently has operations in the Philippines, Cambodia, Vietnam and other Asian markets.

Investment Thesis

  1. EGT is a pure play on the booming Asian gaming market, while still being listed on a U.S. exchange, therefore providing greater transparency with stronger reporting and governance requirements.
  2. EGT has long-term exclusive contracts with the venues, which provide a recurring revenue share of net win.
  3. Highly-experienced management team with over 50 years of combined gaming operations experience among the top 3 executives.
  4. EGT is the preferred partner in Asia and has an extensive pipeline of contracts that should enable the company to end 2008 with 5500 gaming machines in operation.

Business Model

EGT contracts with the casino site operator. EGT provides the expertise to get the operator licensed, designs actual casino, designs the machine mix for the slot floor and optimizes the systems for the venue, pays for the slots machines and systems, and installs everything for the casino. EGT retains ownership of all of the machines and systems. In exchange for this, EGT receives a minimum of a 20% of the net win per day from the casino for a minimum of 5 years. Hence, EGT's business model is completely recurring revenue. Given that EGT participates at the net win level, EGT will have 90% EBITDA margins.

EGT has a very simple business model. You only need to know 3 numbers. (1) the number of machines in operation (2) the blended revenue share percentage (3) the blended net win per machines per day. It is a simple, yet elegant business model with massive leverage as the number of machines increase. Almost all of the revenue flows to the EBITDA line.

Total Addressable Market

The Asian market has a strong socio-economic and demographic trend as well as a strong cultural propensity to gamble. Asian GDP growth for 2007 is expected to be greater then 7% and is the fastest growing gaming market in the world with an estimated 4 billion people. There is also increasing government support for gaming to promote tourism and generate substantial tax revenue as there is an under-penetration of gaming devices compared to the rest of the world.

People per Slot Machine in Asia

Philippines

16,175

Cambodia

9,035

Vietnam

490,000

People per Slot Machine in Other Markets

Australia

111

United Kingdom

223

United States

432

Source: World Count of Gaming Machines 2006, TNS consultant.

Estimated Slot Potential in Asia

2006*

Potential**

Philippines

5,299

182,155

Vietnam

170

170,525

Cambodia

1,662

27,992

Total

380,672

* Taylor Nelson Sofres April 2006 gaming research

** Assumptions based on 500 machines per capita

Adjusting for GDP differences across nations, it is still likely that the current addressable market is approximately 300K – 350K slot machines. This does not include any new markets which are likely to open such as: Laos, Nepaul, Goa, Singapore, Malaysia, India, Taiwan, Sri Lanka, Papa New Guinea, Myanmar.

Revenue Drivers

1. Number of Slots

To date, Elixir has announced gaming machines under contract of nearly 4,000 machines.

Slot Machines Under Contract

Philippines

2,164

Cambodia

930

Vietnam

400

Cruise Ships

500

Total

3,994

Elixir expects to have 1,500 machines in operation by December 31st 2007. Management feels confident that they can bring into operation a minimum of 1,000 additional machines per quarter, which would lead to 5,500 machines in operation by the end of 2008.

2. Average Win Per Machine Per Day

The average win/day per machine in Philippines is currently $200 per day on older obsolete machines. The average win per day in Cambodia and Vietnam is over $200. A newly opened gaming venue takes time to mature. Hence, it is conservative to gradually scale up to $200 win per day per machine over the first 12 months of the venue's operations.

EGT management conservatively estimates that net win will average $125 per machine per day in the first year of a venue's operation and net win/day will grow to $200 as the venue matures. As a reality check, there are currently venues in the Philippines that are averaging over $400 per day. Hence, one could logically conclude that the average net win/day for a mature venue with top-quality gaming machines could well exceed $200.

3. Revenue Participation Percentage

EGT has stated that they will receive a minimum 20% participation of the net win/day. Recently on EGT's 3Q2007 conference call management stated that they are currently receiving an average of 25.4% revenue participation across all of the existing contracts. The revenue participation trend actually benefits EGT as various countries attempt to attract gaming operators to initiate new projects with higher revenue shares.

Barriers to Entry

1. Elixir has deep and well-established relationships across Asia.

2. Elixir is the largest purchaser of slot machines in Asia (outside of Macau). EGT receives preferential pricing on their purchases of slot machines. EGT buyer status provides the company access to the best seller themed slot machines such as Wheel of Fortune and Star Wars. The differentiated slot games create differentiation, which leads to higher then average win per day.

3. Elixir has also a very thorough understanding of regulatory, political and social issues associated with gaming venue development which is complicated and varied by country.

  • For example, in the Philippines you must get approval from the City Council, Local Government, Philippines Amusement and Gaming Corporation (PAGCOR) and the Church to even establish a venue.

4. Melco has a very strong pedigree and is recognized throughout Asia for the success of their Mocha slot chain in Macau.

5. Elixir is also the only recognized operator that offers a full turnkey casino solution.

6. IGT and Aristocrat are unable to do a similar revenue share deal due to their U.S. gaming licenses. This is a key point as EGT buys both IGT and Aristocrat games for its gaming locations.

Valuation

2008

2009

2010

2011

Base

Conservative

Base

Aggressive

Base

Base

Avg. Operating Slots

3,500

7,000

7,500

8,500

11,500

15,500

Ave Win Per Day

$110

$116

$145

$167

$175

$200

Participation

25%

25%

25%

28%

25%

25%

EGT Net Revenue ($M)

$36

$75

$101

$131

$187

$287

EBITDA ($M)

$32

$68

$91

$118

$168

$259

Y/Y EBITDA Growth

110%

182%

267%

85%

54%

EV / EBITDA

20.1x

9.6x

7.1x

5.5x

3.9x

2.5x

We value the company using a DCF and get to a $22 price target based on a 12% discount rate and 5% terminal growth rate.

Veteran Gaming Management

Gordon Yuen is the chairman and CEO of EGT and the Director of Elixir Group Limited. Mr Yuen has an impressive background that encompasses executive roles in major financial institutions and IT companies such as HSBC, American Express International, Inc. American Express Bank and PepsiCo.

Joe Pisano is EGT's Executive Director and has over 25 years' gaming experience and in-depth expertise in the Asian gaming market. Mr. Pisano is responsible for the company's global alliance programs and strategic business development and oversees EGT's marketing operations and research and development of gaming hardware and solutions. Previously he served as the Director of Business Development of Asia-Pacific for International Game Technology (NYSE:IGT).

Disclosure: The author has a long position in EGT.

Source: The Long Case for Elixir Gaming Technologies