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NagaCorp: Future Growth Driven By Positive Macroeconomic Trends And VIP Market Segment

About: NagaCorp Ltd. (NGCRF)
by: Silenda Investments
Silenda Investments
Long/short equity, Growth, growth at reasonable price, hedge fund manager

We anticipate the company is well-positioned to take advantage of the increased number of visitors in Cambodia over the next couple of years.

NagaCorp has developed long-standing relationships with junket operators in the ASEAN region, which could contribute to the company's VIP market growth.

NagaCorp continues to commit paying a dividend payout ratio of 60%.

We recommend accumulating shares of this company if the price falls below HKD 14.30.


In our first article on NagaCorp (HK:3918) or (OTCPK:NGCRF), we will focus on the macroeconomic trends, Naga 2 project which was built back in late 2017 and the company's VIP market business. The company is currently up approximately 72% YTD and is trading at HK$14.26. In our view, the stock price currently seems fairly valued due to strong stock price outperformance compared to the wider HSI index. Nevertheless, our analysis suggests that NagaCorp's future operational performance will be driven by (1) higher number of tourists visiting Cambodia over the next couple of years, (2) better revenue outlook of NagaCorp and political environment regarding gaming business compared to Macau-located companies, (3) robust revenue growth rates and improved operational leverage of VIP market segment in the near future, (4) non-gaming revenue opportunities of Naga 2 project. We recommend that investors accumulate shares of this company as long as the company falls below HK$14.29.

Market Dynamics

According to the World Bank report, the Cambodian economy achieved a real GDP growth rate of 7.5 percent in 2018 up 50 bps y/y. Robust economic growth was primarily driven by healthy domestic consumer spending combined with stronger overseas exports to both the U.S. and European Union. However, the ongoing U.S. - China trade dispute is adversely affecting global trade trends leading to lower growth of export-reliant economies. Consequently, analysts from the World Bank team anticipate that the growth of the Cambodian economy is expected to decline to 7% in 2019.

(Source: CEIC data)

According to the figure above, the annual FDI inflow into the Cambodian economy amounted to over $3.0 billion in 2018, which makes up approximately 13% of GDP in 2018. In case our readers are not familiar with the term Foreign Direct Investments or FDI, it consists of all investments of foreign individuals or businesses who own over 10% stake of an e.g. Cambodian company.

(Source: The Balance)

FDI is really important for developing or emerging economies, given that foreign investors usually fund very important infrastructure-related projects like electricity networks or water supply systems which leads to a better quality of life. In the case of NagaCorp, the company recently announced that it is expected to invest up to $4 billion for the Naga 3 project, which is located in the capital city Phnom Penh.

"Asian casino investor NagaCorp Ltd says it expects to invest between US$3.8 billion and US$4 billion in another extension to NagaWorld casino resort in Cambodia's capital, Phnom Penh. Naga 3, to be developed in a combined land area of 16,837 square metres (181,232 sq. feet), will expand the company's gaming and non-gaming offerings, said the promoter in a Wednesday filing."

(Source: GGR Asia)

If we compare this number with the FDI and actual GDP of $3.0 billion and $24.57 billion, respectively in 2018, we can easily identify how important are investments of NagaCorp for the Cambodian economy. For instance, particular investments lead to a stronger boost of the domestic construction industry and later on result in the massive inflow of tourists from neighbouring countries, leading to higher consumer spending. Particular entertainment and hospitality projects of NagaCorp are also important because they drive the interest of international tourists, who are massively visiting top destination spots of Thailand and Indonesia in ASEAN region. For example, an overseas tourist who is already familiar with gambling spots in Las Vegas might book a trip for a longer period in Koh Samui in Thailand. Given that he is already in the ASEAN region, he might be interested to visit neighbouring countries like Cambodia or Indonesia as well. After he finds out online about the NagaWorld complex in the capital of Cambodia, he might be willing to book a trip. Afterwards, he can experience both visiting key tourist destination spots in Cambodia as well as the entertainment and gaming part of the NagaWorld complex.

(Source: Tourism of Cambodia)

According to the figure above, the number of International Tourist Arrivals has increased from 4.21 million in 2013 to 6.20 million in 2018, which makes up a CAGR of roughly 8% during the same period. The average length of stay has remained slightly less than 7 days over the last several years, while hotel occupancy has slightly increased for 270 bps to 72.2% in 2018. On the other hand, international tourism receipts have grown with a very strong CAGR of 12% during 2013-2018. In our view, it was primarily driven by Chinese tourists who have stronger consumption capabilities as a result of the robust macroeconomic growth of China in excess of 6% over the last decade.

"In Cambodia, Chinese tourists continue to top the list of visitors by nationality. 1.9 million Chinese nationals visited Cambodia last year, a whopping 70 percent increase, Tourism Minister Thong Khon recently said. The minister added that by 2020 the government expects at least 3 million Chinese tourists a year, projecting that the total number of international tourists will reach 7 million that year."

(Source: Khmer Times)

Given that the Cambodian Minister of Tourism anticipates an even higher number of Chinese tourists over the coming years, we believe that NagaCorp is well-positioned to capitalize on this massive inflow of Chinese tourists in the country. The reason is Chinese are only allowed to gamble in Macau which is well-known for its luxury gambling facilities, which come often with a higher hospitality price tag as well. Therefore, Macau-like gambling and hospitality facilities of the NagaWorld complex make a perfect destination for Chinese gamblers to take advantage of their stronger local purchasing power in Cambodia compared to Macau.

(Source: Tourism of Cambodia)

According to the figure above, Phnom Penh and its surrounding area remain the key tourist destination over the last several years. Furthermore, it makes up roughly 50.5% of total foreign visitor arrivals in 2018 compared to 49% in 2016. On the other hand, coastal areas of Cambodia with its Thai or Bali equivalent beach resorts are gaining increased recognition among the overseas travellers to the ASEAN Region. In fact, coastal areas attracted roughly 877 million foreign tourists last year, which makes up 12.3% of total foreign visitors in 2018.

The key destination spot in the coastal areas is Sihanoukville, which is well known for its beaches and tropical islands. Given the increased investments into mass tourism projects in the Sihanoukville area over the last couple of years, gambling resorts and spots have gained in popularity as well.

(Source: Google)

While conducting a basic Google search, we could easily identify plenty of high-end Hotel & Casino resorts in Sihanoukville. Prices for a day stay range from $30 to up $200 per day. Based on Google reviews, customers are quite satisfied with the resorts by rating them with 4 or 5 stars on average. However, Chinese authorities are not content with the massive development of gambling resorts outside the capital city area, given that they usually operate online gambling operations as well. Based on information published by Inside Asian Gambling, more than 10,000 Chinese tourists visiting gambling spots in Sihanoukville had to flee the Area last month.

"It was revealed last month that Cambodia would stop issuing online gaming licenses and wouldn't renew any current licenses when they expire, as per a directive from Prime Minister Samdech Techo Hun Sen. The directive is believed to follow pressure from Beijing to crack down on a surge in casino developments in Sihanoukville, Bavet and Poipet - the majority of which have been focused on the provision of China-facing online gaming operations."

(Source: Inside Asian Gambling)

In our view, if Chinese authorities continue with increased regulatory restrictions targeting areas outside the capital city of Phnom Penh where NagaWorld complex is located, we believe that will help the NagaCorp to maintain strong kind of monopoly position within Cambodia. Furthermore, it would be supported by both Cambodian governments as well as indirectly by Chinese authorities.

VIP Market Segment and NAGA 2 Resort

(Source: Google)

Based on information on the company's website, Naga 2 offers its customers exclusive premium gaming halls/suites with gaming tables and electronic gaming machines of more than 300 and 2,500, respectively. By watching a video linked here, our readers can get a better insight into the entertainment and hospitality features of NagaWorld II complex.

In terms of gaming revenues, Naga 2 is an important contributor to VIP business growth, driven by the increased inflow of guests reached by South East Asian and Macau-based junket operators. In fact, customers are looking for higher table limits at Naga 2 compared to some other spots in the ASEAN region.

"A few large Macau-based junket operators have set up fixed based operations and officially commenced bringing in VIP players to NagaWorld during the Period. In addition, another notable Macau-based junket operator, Suncity Group, has moved its operation in Naga 2 to a dedicated larger space that accommodates more VIP tables and other supporting entertainment facilities. "

(Source: Interim Report H1 2019)

In our view, junket operators in the ASEAN region are motivated by driving traffic into NagaWorld complex due to a better compensation plan compared to what some other Macau-based gaming companies offer. For a better understanding, junket operators receive both credit and revenue-sharing commission for bringing in VIP guests, which are usually reached by hired agents.

We anticipate that an even higher number of junket operators will try to work with NagaCorp compared to other Macau-based companies, given that revenue outlook for FY19 of Macau gaming companies is in mid-single digits. Based on consensus estimates, Sands China (OTCPK:SCHYY) and Wynn Macau (OTCPK:WYNMF) are expected to reach a revenue growth rate y/y of 6.40% and 2.50% in FY 2019. On the other hand, based on our conservative estimates, we anticipate that NagaCorp will generate total revenue of roughly $1.92 billion in FY 2019 or up roughly 30% y/y. Therefore, NagaCorp will be able to offer better compensation plans for junket operators in the near future compared to Macau-based counterparts.

In addition, NagaCorp puts a strong emphasis on its VIP business. Therefore, it has developed the competitive overseas junket incentive program back in 2013. It helps the company to drive the growth of table limits in the long run, making its Naga 2 gaming facilities competitive to attract high-end VIP guests in the region. That way, the company can manage the volatility of its VIP-related revenues while reducing exposure to credit risk.

(Source: Annual Report 2018)

According to the figure above, VIP market revenue represents 72% of total revenue in 2018 compared to 65% in 2017. However, even though it is the most growing business segment of the company gross profit margin is the lowest compared to other business segments. The reason is that the company must pay hefty compensation plans to junket operators to reach customers compared to the mass market segment. For instance, electronic gaming machines in the mass-market business, have pre-set win/loss ratio by slot manufacturers with low costs of operation, thus making it a very high margin business.

Another important factor for the future VIP business growth is an integrated casino resort so VIP guests can enjoy both the gaming side of the facility combined with an entertainment part, which involves restaurants, duty-free shopping, and other wellness-related offerings. Non-gaming side of the entire NagaWorld complex makes it a great spot for business executives to spend their free time while visiting Cambodia for business purposes. On the other hand, tourists are usually travelling to Macau only for gaming purposes, while being under higher scrutiny from Chinese regulators.

In addition, NABA Theater with over 2,000 seats at Naga 2 complex, has gained traction from both locals and foreign visitors for its localized as well international type of shows. We anticipate that NABA Theater with its high-quality live performances and positive industry trends of increasing the number of visitors over the next couple of years will become an important non-gaming revenue generator of the Naga 2 complex. For instance, Showtime Asia event hosted the most skilled live performers around the world with a price tag of only $25 per ticket in April 2019.

"If you want a pre-show meal, enjoy great savings with NagaWorld's special "Dinner & Show for 2" packages starting from $68 with The Pangea or the 2Pangea's luscious buffets. For an after-show treat, choose from a wide range of delectable sweets at 2Pangea's dessert buffet for $12 per person, or head over to Food Pavilion (Lower Ground Level, Naga2) for a myriad of Asian cuisine options at budget-friendly prices."

(Source: Khmer Times)

In our view, pricing of NABA Theater seems to be in the range of city theatre of Beijing, where, on average, event tickets cost between RMB 200 and RMB 450 depending upon the type of seat. Consequently, we believe that Chinese, as well as foreign visitors, might find particular events and shows of NABA Theater as a good bargain deal, given that they receive pre and post-show meal packages as well. To sum it up, even though non-gaming revenue currently represents only 3% of Total revenue, we anticipate that number to grow in the near future driven by non-gaming facilities of the Naga 2 and the entire NagaWorld complex as well. It will also drive to improve cross-sales of the entire company as well, as once visitors enter for instance NABA theatre they might become tempted to try their luck in gaming facilities.

NAGA 3 Project

(Source: Khmer Times)

The Naga 3 project will be three times in size of the current NagaWorld complex by creating new additional 5 towers, with all the above 40 levels in height. Naga 3 will have more than 4,700 new hotel rooms, a 12-level multi-entertainment podium, including a digital theme park and additional gaming (new tables and slot machines) as well as non-gaming facilities like outlet stores, business spaces or additional restaurants. The company anticipates building an underground walkway to connect all of the Naga 1, 2 and 3 resorts.

(Source: Press Release)

According to the figure above, the total estimated all-in construction costs will be around $2.08 billion, while total estimated all-in development costs roughly $3.51 billion. Based on the press release, about 50% of the financing of the Naga 3 project will be funded by a personal loan from the chairman for an exchange of new shares at HK$12.00 per share. The other half the company estimates to be able to cover with internal cash flow generation over the coming years.

Moody's vice president and senior credit officer Jacintha Poh are optimistic about the financing of the project:

"We also expect the company to have sufficient resources over the next three years to fund 50 percent of the development cost, with the remaining share funded through equity contributions from Nagacorp's controlling shareholder, Tan Sri Dr Chen Lip Keong, who has a track record of providing funds for Nagacorp's previous expansions,"

(Source: Khmer Times)

In our opinion, in the case all-in development cost exceeds initially estimated $3.5-4.0 billion in the end, then we are slightly concerned that the company might have to issue new shares or corporate bonds. One option is an additional public offering of shares. However, we anticipate that the chairman might give the company another personal interest-free loan for an exchange of new shares at a premium price. Another option is by debt-related financing and the company has already previously issued a $300 million corporate bond. The company is located in Cambodia. Therefore, its debt securities have a high-risk premium priced in the yield because of country-related risks. Consequently, we anticipate that in the case NagaCorp would have to issue new corporate bonds with a total gross value of over $1 billion, then they would come up with an unfavourable high-risk type of yield, which would lead to high-interest costs payments, before the completion of Naga 3 projects. Nevertheless, the projected total development cost of the Naga 3 project is in line if compared to some integrated gaming companies in Macau or Singapore.

(Source: Press Release)

According to the figure above, CAPEX of most of NagaCorp's direct peers in the ASEAN region has been in the range of $3-6 billion. For instance, the Wynn Palace Macau property which was completed back in 2016 for roughly $4.4 billion had only 1,706 rooms vs. 4,720 of Naga 3, which makes up the cost per room of $2.58 million vs $0.74 million of Naga 3. One of the reasons for such a gap is the following:

"Colliers notes that at the higher end of the scale i.e. for properties in Macau and Singapore in particular, the requirement to provide significant non-gaming activities, particularly retail, entertainment and conferencing/exhibition facilities, as part of the integrated resort development has largely driven these substantial amounts. Colliers also notes that Naga 3 may not include this scale of non-gaming facilities and would, therefore, expect anticipated development costs to be much lower"

(Source: Press Release)

In addition, colliers note the Naga's 3 all-in development cost per sq.m. of $6,415 is in line with high-end 5-star hotels in Phon Phem city and other Asian proxy cities like Macau ($6,621). To sum it up, we believe the Naga 3 project is one of the key bullish catalysts coming from the pipeline of new projects. Furthermore, based on our DCF analysis in the next section, will end up being highly accretive to existing shareholders.


(Source: MarketScreener Site)

Major casino resorts located in Macau are currently trading around at FY19F EV/EBITDA in the range of 10-13x. In addition, NagaCorp whose operations are located outside Macau is trading in-line with its direct Macau peers at FY19F EV/EBITDA of 11.20x. However, we believe that it should trade at a slightly higher due to upcoming projects such as Naga 3 and Naga Vladistovak.

(Source: 2018 Annual Report)

We anticipate that EBITDA will continue to grow at a 5-year CAGR rate of 24% in 2019, which results in an EBITDA of $634.6 million. In our view, the potential future increase of the stock price will be driven by the high-growth VIP business, as the company is well-positioned to capitalize on the flattish outlook for most Macau-based companies combined with an increased number of tourists visiting Cambodia year after year. Furthermore, we believe that its existing integrated casino resort with a strong pipeline of non-gaming offerings combined with active overseas junket operator incentives programs makes it well-positioned to drive further shareholder value creation.

(Source: AAstocks Site)

According to the figure above, the company has reported a record-high dividend of HK$ 0.4185 in 2018, over the last couple of years. In addition, the company reported a dividend of HK$0.2627 for the first half in 2019, which makes us believe that an annual dividend in 2019 might break HK$0.50. Furthermore, the current dividend payout ratio of 60% is supported by free cash flow of $222 million.

As such, we recommend dividend investors should consider accumulating NagaCorp., given that it offers a current dividend yield of 3.75%, which is supported by strong operational performance and free cash flow generation.

(Source: Finance Yahoo)

In terms of short-term challenge over our valuation, we anticipate primarily (1) weaker-than-expected earnings numbers for FY 2019, (2) U.S-China Trade Dispute (3) Political Crisis in Hong Kong. Even though the company has most of its operations in Cambodia, international investors might start selling HSI Index related instruments because of previously mentioned (2) or (3) factors, which would put pressure on most of the stocks traded on HKEX. On the operational side, we mentioned in our next section, some of the key risks which might put the stock price performance and our valuation under pressure.



(Source: Silenda's Investment)

NagaCorp has three primary business models, namely: (1) Mass Market gaming, (2) VIP Market gaming, and (3) non-gaming.

(Source: Silenda's Investment)

We take on a more conservative stance as compared to street consensus. We believe that the company revenue will hit $1.92B by 2020. VIP Market revenue increased by 17.5% YoY in H1 2019, driven by an increased number of high-end VIP visitors from the wider ASEAN region who appreciate combined integrated NagaWorld complex for its gaming and entertainment-related experiences. Nevertheless, the company has been increasing the junket operators' compensation & incentive plans as well as marketing-related expenses to attract a higher number of high-end VIP customers. Therefore, the gross profit margin has plummeted from 49.5% in 2017 to 45.7% in 2018. On the other hand, the total operating profit margin slightly improved from 26.7% in 2017 to 27.7% in 2018.

Nevertheless, both gross and operating margin continued to improve to 46% and 31%, respectively in 1H19. We believe this was driven by robust revenue growth of VIP Market combined with more efficient marketing promotion initiatives. Furthermore, as the company grows in size and improves its operating leverage, we anticipate that a higher proportion of VIP market revenues will lead to improved overall gross and operating margins over the long run. We anticipate that both gross and operating margin to be in excess of 45% and 30%, respectively, in 2021 and onwards.

Below is a projection of the company's performance into 2021.


  • General macroeconomic risks of the Chinese economy, especially with all of the potential negative effects on the real GDP growth as a result of the present trade dispute with the U.S.
  • General macroeconomic risks of the Cambodian economy, which heavily relies on its exports towards North America & European Union and on FDI inflows from Chinese companies or individuals.
  • Intensified competitive pressures from casino resorts in neighbouring countries in the region including Macau, South Korea, Japan, Vietnam, Malaysia as well as from the domestic Sihanoukville area.
  • Lower-than-expected operational performance of VIP business, which would lead to lower total revenues over the long run.
  • Potential regulatory constraints or restrictions, which might target the monopoly kind of status of the company in Cambodia.
  • Cambodian government might decide to unexpectedly lift the tax rate of gambling resorts even further from an anticipated 5% in H1 2020.
  • Given the current political situation in Hong Kong, investors may fear companies trading on the Hong Kong exchange. Moreover, Hong Kong is expected to fall into a recession with a GDP growth decline of 0.1% - 1% due to issues in the domestic market. However, NagaCorp's actual operation is in Cambodia and most of its customers are coming from China. Therefore, there should not be any significant material impact on NagaCorp. If anything, now may be the best time to accumulate these shares due to misperceptions in the market.
  • Investors may choose to invest in the US OTC markets where volume is extremely low. Currently, the average volume is only 7,753 which is extremely low. However, the volume risk is being offset by the FX rate where it is only traded at 1.80 USD (14.11 HKD) as compared to the actual share price in Hong Kong (13.88 HKD). In our opinion, we believe that investors should accumulate the shares traded in the Hong Kong exchange if their brokerage firm allows them access to the Hong Kong market as volumes in the HKEX is significantly healthier at 3.6M. Based on the below chart, clearly, OTC represents more risk as compared to the HKEX. We have to reiterate that the trading via OTC is highly risky as compared to the normal exchanges. Trading OTC is highly unregulated, and in our view, the biggest risk is liquidity, making investors hard to actualize their potential gains in time or should there be a need for investors to cash out immediately.

(Source: Finance Yahoo)


Overall, given the current steady growth rate, positive macroeconomic trends of the Cambodian economy and strong recognition of its combined complex NagaWorld in wider ASEAN region, we find as the critical catalyst that NagaCorp's strategy and attempt to concentrate its business model into a higher proportion of VIP market business. In addition, that will lead to gross and operating margin expansion, which will enable the company to maintain a strong market position in both the domestic and wider ASEAN region. Consequently, it will position the company to create substantial value for its shareholders in the long run as well. We reiterate our recommendation to accumulate NagaCorp if the company falls below HKD 14.30 per share. In addition, we recommend dividend seeking investors to consider investment opportunities for the current NagaCorp's dividend yield of 3.75%.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.