Will Vladivostok Become A Mini-Macau? Part 3 - September Update

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Includes: BJK, GXYEF, MALDF, NGCRF, SMTNF
by: Patrick M. Crowley

Summary

The bidding deadline for the 3 remaining plots in the Primorye casino development zone near Vladivostok, Russia, was extended until the end of September.

The expedited electronic Russian visa process went into operation on August 8, 2017, allowing much less bureaucracy to visit Vladivostok for citizens of 18 countries, including China.

To date, interest in the 3 remaining plots was reported by the provincial regulator as originating from Chinese, Russian and European gaming concerns.

Summit Ascent's H1 interim report for 2017 showed a significant increase in VIP Chinese gambling, but a fall in low stakes gambling revenues. The decline in the stock price on this news is likely a good entry point for interested investors.

Nagacorp also reported in its H1 interim report that construction was on target for their NagaWorld resort to open in late 2019.

Preliminary Note

This article is an update to 2 previous articles published on this subject (here and here), so only recent developments will be covered. Interested readers should refer to the previous 2 articles for context and background info.

Bidding Process Extended

Probably the most important news that occurred since my Part 2 article is that the Primorski Krai Development Corporation extended the bidding process for the 3 remaining plots in the Integrated Entertainment Zone (IEZ) until September 28th, 2017, and stated it had received a “number of applications” from companies based in Russia, China, South Korea and several European countries.

This signal may possibly attract even more interest, as it appears that there are at least already 5 bids that have been submitted for the 3 plots available, so the development of the IEZ itself definitely looks as though it will occur. See here and here for more information from the Development Corporation.

This means that the speculation in the last article that I wrote on this subject is likely correct. I would not be surprised, therefore, to find that Galaxy (OTCPK:GXYEF) (HK:0027) or Macau Legend (OTCPK:MALDF) have made a bid for one of these plots.

The Development Corporation obviously expects this to be a successful process as their Director, Andrey Folomeev said recently that 2 further plots may be also opened up for bidding after this round of auctions. It appears that of the 3 plots available, 2 of these plots have received bids so far - presumably those with more attractive locations within the development.

Of course, this may change by the time the end of September rolls around. At the least it implies that there will be 2 more casinos in the IEZ, which will bring the total to at least 5 casinos. That is starting to look more like a more interesting tourist destination than just the single casino that is currently operating in the zone.

Artist impression of NagaWorld Visa Program Now In Operation

The other major news, whose importance should also not be underestimated, is that the expedited electronic visa program went into operation in early August. This program allows citizens of 18 countries (Algeria, Bahrain, Brunei, India, Iran, Qatar, China, North Korea, Kuwait, Morocco, Mexico, UAE, Oman, Saudi Arabia, Singapore, Tunisia, Turkey and Japan) to visit the Vladivostok region, and the IEZ in particular. Although this list appears quite eclectic, the most important country here is China, as this is the main addressable audience for the casino development.

From August 8th, 2017, the Russian Foreign Ministry started issuing visas on the basis of an application filled in on the ministry’s website four days before arrival. There is no consular fee and the visa is issued for a period of 30 days, with a maximum stay of no more than eight days (see here for the visa website and here for more info). After much foot-dragging on this issue, its implementation should improve the fortunes of the Tigre de Cristal casino (owned by Summit Ascent) significantly in the second half of the year.

This, coupled with the fact that the management of the Vladivostok airport has now been handed over to a Singaporean concern (see here), so as to develop the international linkages from Vladivostok to other major population hubs (notably in China), bodes well for the future development and the attraction of the zone.

Possible Federal Oversight From 2018 Onwards?

Part of this flurry of activity may be due to threats from the Deputy Prime Minister Yuri Trutnev to take over the Primorski Krai Development Corporation as of December 2017. An article appeared online (see here) stating as such, although this is still speculation and has not been confirmed elsewhere. Indeed, there is nothing on the Development Corporation's website stating or suggesting that this would or could occur.


Summit Ascent H1 2017 Results

The majority partner in the Tigre de Cristal casino, the only casino operating in the Primorye IEZ, is Summit Ascent (OTC:SMTNF) (HK:0102), and it released its H1 2017 results on August 31st. The full release can be accessed here.

On the surface, the results did not appear good - the casino operator moved from a small profit in 2016 to a small loss in H1 2017, and the response in terms of its stock price was crushing, with the stock price plunging an 11.64% the day after (Friday September 1st).

After studying the release carefully, I think the results were actually not bad at all, and with the developments listed above, point to a much better picture going forward. So in brief, the results were as follows:

  • Net revenues up by 20% from H1'16.
  • HK$5.4m loss in H1'17 compared to roughly the same amount in profit for H1'16.

But if you look under the hood, there were some interesting developments within the reported results. So briefly:

  1. One first has to recall that the Tigre de Cristal has only been open since November of 2015. Summit Ascent has its roots as a Hong Kong tiling and manufacturing company - the gambling venture came after billionaire investor Lawrence Ho took over the company. In H1'16, it sold the legacy part of the company off and disposed of assets. That is what led to the H1'16 profit. In H1'17, there was nothing to sell off from that legacy business, so that's the main reason why the profits were lower.
  2. The main source of revenue at the casino is the so-called "rolling chip" VIP business (which mostly attracts Chinese and other foreign tourists) - what happens here is by far the most important money-generating part of the Tigre's casino business. 2 things to note here - a) the turnover rate increase was a 234% increase from Q2'16 to Q2'17; and b) the number of tables open on average increased from 9 in Q2'16 to 18 in Q2'17. So the turnover per table also increased from HK$235.6m in Q2'16 to HK$275.8 in Q2'17, which is a 17% increase.
  3. The mass table business is an important but a secondary source of income. Most of the business on the mass tables comes from Russians and then some low-stakes foreign visitors. The turnover fell from Rb1027 in Q2'16 to Rb929 in Q2'17. But once again, the management has clearly reallocated a couple of tables over to the VIP business (as the number of tables open in Q2'16 was 22, compared to 20 in Q2'17. If we do the math, we find that turnover per table was Rb46.68m in Q2'16 compared with Rb46.45 in Q2'17. That is virtually unchanged. And in the report, the management state that part of the reason for this fall in Russian foot traffic relates to other illegal gambling opportunities that the authorities have recently cracked down on, so this fall should be temporary and these numbers should turn around fairly soon again.
  4. In terms of the other business, the hotel had a 97% occupancy rate on the weekends, despite 3 of those months being winter months, and despite rates of over US$300 per night per room. In its report the company said that at weekends it often had to provide accommodation elsewhere and then ship the guests back-and-forth to the casino. This is a high quality problem and bodes well for the new phase 2 casino development already underway.

See below for the relevant tables extracted from the Summit Ascent H1 report.

Other news

In other news, it was confirmed by the other foreign casino operator that has committed to the IEZ, namely Nagacorp (OTCPK:NGCRF) (HK:3918), that their Vladivostok office had been opened and that after a delay, their casino construction was underway with a projected opening of their new casino, Nagaworld, in late 2018.

Also the Selena Casino project, which is being developed by a private Russian consortium, broke ground on their project as well.

Bottom line for investors

Developments in the Russian Primorye IEZ outside Vladivostok have moved fast in the last month as I predicted in my previous article on this subject. These developments all move the project forward in the right direction and bode well for the future.

Clearly then, when the market opened in Hong Kong and the stock of Summit Ascent sunk by over 12%, I feel that the market has overreacted to the headlines in the Summit Ascent H1 financial report, and not really put the results into their proper context. Above, you can see that reaction last Friday with the price dipping way below where it has been over the previous month. In the US, the ADR fell by 6.27% from $0.255 to $0.24 on Friday, September 1st.

Obviously, if you agree with my analysis above, given that there likely will be no secondary offerings in the pipeline in order to pay for the phase 2 expansion currently underway, this is an extremely good time to start accumulating Summit Ascent stock. So the bottom line is that with the above caveats, in my view, this is an attractive entry point for a growth stock given the underlying developments currently in play.

Disclosure: I am/we are long SMTNF, NGCRF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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