NagaCorp Ltd

Nagacorp: One of the Best Bets in Asia Gaming at an Attractive Entry Price in Early Recovery Cycle

Equity Bottom-Up
505 Views, 28 Sep 2021 22:04
  • Nagacorp weathers the pandemic storm as it begins to subside with a management skill set that has been tested in crisis and emerged poised for an upside as the recovery cycle of tourism that fires its growth speeds up.
  • The price at writing at $6.430HKD does not anticipate exponential rises in run rate we see coming by year's end.
  • Pre-pandemic 5-year annual growth averaged 24.22% and is likely to accelerate.

 Investment thesis now:(All amounts shown in HKD unless otherwise specified).


We have been long time fans of Nagacorp stock for a variety of reasons. No grounds for our bullish views have been more compelling than its consistent display of a high order of management skill that is simultaneously productive of earnings growth as well as demonstrating a commitment to smart social policies. Nagacorp’s steady property expansion has been undertaken recognizing the immense value of its Phnom Penh licensing exclusive. While Cambodia’s base population is relatively small for Asia, (16.4m) its traditional tourism base pre-pandemic was immensely fertile in contributing to its steady revenue growth.

Nagaworld sits on a fortress exclusive in Phnom Penh.

Especially productive was its healthy flow of China tourists. During pre-pandemic 2019, total tourist arrivals in that nation hit 6.6m. Of those, Chinese visitors contributed 2.3m and was trending sequentially higher than the prior 3 years. Now it is a given that China outbound tourism remains the largest single source of tourists to all the nations of Asia, so the strong showing of Cambodia should come as no surprise.

 But without question world heritage tourist landmarks like ANGKOR WAT are highly prized attractions as are the many rich cultural experiences of that nation in general. But one of the not so secret, yet undervalued, contributors to the long- term stability and growth of China gaming tourism to Cambodia, including VIPs, is that nation’s positive bilateral relations with Beijing. That is a firm foundation upon which to build.

 Political and economic ties between Phnom Penh and Beijing have given Nagacorp a stronger setting for its business present and future than is the case in the casino business in other nations. Regulatory pressures vary considerably from light to heavy handed. In Macau for example, there has long been ongoing anxiety among operators there about the regulatory objectives of both the SAR as well as their Beijing masters if you will. That issue will be resolved next year.

  We have already seen how in 2015, innumerable regulatory tightening due to anti-money laundering policies, junkets, photo IDs, etc. spooked the market—particularly the VIP sector. GGR suffered as top players fled cross border to venues like the Philippines, South Korea, Vietnam, Australia, and Cambodia.

 Other Asian nations regulatory structures spanned level-headed economics and policy, to direct control, to out and out ownership of casinos (The Philippines). All have enjoyed powerful inflows of China tourists, but due to political tensions between Beijing and Washington, some have experienced punishment. (S. Korea over the 2016 THAAD US missile placement deal). Beijing officials lately threatening tourist blackballing was serious given the THAAD experience that bludgeoned tourism to South Korea for over a year.

 Among all these nations, Cambodia stands out as enjoying highly stable, positive relations with Beijing going back to the post Khmer Rouge genocide years between 1975-79. Key political figure Hun Sen, has over decades managed close ties with Beijing, most recently supporting denials by China of the accusations that the deadly virus originated out of the Wuhan laboratories.

 This relationship is basic to Nagacorp. It is the underpinning of  the confidence majority owner/founder of Nagacorp CEO Dr.Lip Keong Chen has enjoyed. He has opted to expand his Nagaworld property beyond its original size to Naga2, and is now planning for Naga3, expected to open before 2024/5.  By its completion, Nagaworld will rate among the globe’s largest and most profitable casino resorts.

Long term projections pre-pandemic but keyed to growth trend are highly positive.

That expansion will bring the property to over 5,000 rooms with 1,300 table games and 4,500 slot machines. What is instructive here is Dr. Chen’s personal investment in expansion totaling US billions both in Naga2 and Naga 3 ongoing. That is an expression of confidence in the stability of Nagcorp’s position regarding the Phnom Penh regulatory structure and globally its positive relations with Beijing going forward.  Naga3 could be open by 2024/5.

 This is briefly means that unless there is a drastic change in the direction of Cambodian foreign policy, the possibilities of that nation being blackballed by Beijing are minimal to virtually non-existent. China has been, and continues to be, the largest single foreign investor in Cambodia’s economy to date. Cambodia has walked the ideological tightrope deftly, supporting the election of former US President and Beijing critic, Donald J. Trump, yet lauding many economic and social policies of Beijing. Below: Considerable room for equity additions going forward.

It may strain the imagination of some investors to think of Nagacorp’s stable, positive relations with Beijing as an invisible balance sheet asset in a sense, but considering the potential for disruption by intrusive government over-regulation, to us, the Beijing-Phnom Penh relationship is worth $1.15 a share to any valuation of the company’s shares. We arrive at that figure by applying our archive data on the costs of excessive or hostile regulations we have calculated over our 30 year career in the industry. It factors rising costs of compliance, politically charged actions to raise gaming taxes, etc.

Above: Gaming dominates revenue stream (yellow) but growth expected for non-gaming ahead.(red slice).

 Vaccination initiatives among the globe’s best

 During the height of the 2020 pandemic year, Nagacorp voluntarily suspended operations in line with the government’s strong initiative to rapidly accelerate vaccination programs. The government’s aim was to vaccinate 90% of the entire populace over the age of 15 by the end of 2021. As of late August, they have achieved 90%.

 Economically, as recovery slowly emerges with re-openings of the economy, the Asian Development Bank has forecasted a 4% growth of GDP for Cambodia during the recovery phase in 2022. This is good news for Nagacorp’s mass locals business. Bear in mind, that nation has an estimated 300,00 to 700,000 (rough estimates) permanent Chinese residents who comprise a core player base for the Phonon Penh property.

 Given the political stability, relatively low case rate of Covid, mass vaccination almost completed, continuing investment by China, and overall economic growth ahead, Nagacorp now sits at recovery prospects we do not believe are yet reflected in the ongoing share price action.

 Key numbers: Nagacorp (3918HK) HKD unless otherwise specified.

 Price at writing: $6.430

Market Cap: $27.91b

Beta: (5yr monthly) 1.38.

P/E (ttm)  6.88. This is still pandemic impacted ratio and bodes well for a much more attractive value through the next quarter.

EPS (TTM) $0.935. Early stage pandemic easing earnings likely to exponentially increase by 4Q21—1Q22.

 1 year analyst target: $9.95. Projecting the acceleration of ramp once travel restrictions further ease by early 2022 we find a case to be made for a higher PT here. We looked at the 5 year high of Nagacorp achieved on Oct 1,2019 when the full thrust of accretive revenue and earnings related to the opening of Naga2 in late 2017 materialized. Momentum was strong going forward and the sock traded at $14.280.

We have factored in a continued moderation of pandemic issues largely confident that Cambodia will achieve its inoculation goal by year’s end. We also looked at the growth of the mass segment of its gaming GGR, plus its holding fairly firm on VIP in the same period.

 On that basis our PT by 1Q22 is $12.560 A quantum leap in this trading range will slowly build and arrive at new highs in our forward projections of Naga earnings with the debut of Naga3, going forward to 2024.

 Total revenue (ttm USD): $878.681m

2019: $1,755,466

2018:   1,474,287

2017: 956,340.000

Operating margin (ttm) 12.85% includes core pandemic months when Nagacorp voluntarily shut down.

Total 6m Adj. EBITDA US$17.7M includes shut down period.

 Balance sheet highlights:

Total cash (mrq) $302.690m

Total debt:S606.04m

Current ratio: (mrq) 1.49. Levels of liquidity clearly more than adequate  to meet obligations going forward.

Operating cash flow (ttm) $8.14m

Levered FCF (ttm) --$164.55

In June the company issued US$337m in 7.95% senior notes due 12/24  to replace all or in part maturities for 2021.

This last spring, Naga repaid US$300m of 9.375% senior notes with a 5/21 maturity.

 Vladivostok, Russia project

 This month, Nagacorp has resumed development of a US$300m integrated casino resort in this Asian gateway to the Russian Far East.  The 11 story 279 room hotel casino will include a 2,000 seat theater, dining and retail amenities. A contractor has been selected and work commencing on the first structural phase of the project. The project could open by 2024 or before.

 The challenge of a casino property in the Russian Far East city has a history dating back to the entry in 2009 and subsequent departure in 2017, of Melco’s (MLCO:NASDAQ) Lawrence Ho. He had bought into the Tigre de Cristal casino there with the prospect of expansion. But soon thereafter, Moscow authorities suddenly announced its intention to double gaming taxes. Also there was an ongoing problem with nearby illegal casinos in the general vicinity of the proposed development. The concern was that regardless of how extensive and attractive a new, large integrated casino resort would be, the draw of the illegal salons would continue to drain VIP and other segment businesses from the new properties.

 These concerns apparently posed no barrier to Naga’s Dr. Chen. Like other potential investors there he saw not only a local market for such a property, but eyed the cross border potential of the abutting provinces of China. Easy visa requirements make it simple for China players to visit the Russian city.

 The Russia facing provinces of China hold a population of over 26m. The flying time between Shanghai and Vladivostok is 2.5 hours, a huge target market for any new property—assuming relations between Moscow and Beijing, now considered cordial, continue.  The flying time from Shanghai to Macau is roughly the same as to Macau. Given the geography, weather of course, will play its hand in the harsh winter climates of the Russian Far East. A more pressing challenge is political in that the Russian population has long feared Chinese economic incursion into its areas to get at its mineral wealth. Beijing’s Belt and Road Initiative has made some initial investments there, but thus far, both countries seem to be circling one another attempting to work our an economic accommodation that will allay fears and increase China investment.

 Either way, the political value of Nagacorp’s Cambodian presence and consequent stable government relations with China, imply clearly that a Naga property in the Russian Far East would be seen as far more welcome than other potential developers. We think this has clearly played into the decision of Nagacorp to move ahead confidently in the Russian Far East.

 Going forward

 Area operators we spoke to expressed the hope that tourism in general, and arrivals from China specifically could be at the beginnings of a strong recovery by the end of this year. It is a hope sprung out of the confidence that the Cambodian government’s target of 80% vaccinated by year’s end is reachable. Furthermore we have China’s claims that it expects to have vaccinated as much as 80% of its population by year’s end. Skeptics are plentiful who routinely question China’s pronouncements and forecasts. Yet, we do know that vaccinations have been proceeding at a steady pace throughout the country. And should the Delta variant begin to wane by year’s end, as some medical authorities believe, we think it is a reasonable expectation that tourism to Cambodia will begin to revive and ramp quickly. Pent up demand will see to that.

 Nagacorp stock at its present trade does not as yet have this prospective recovery baked into its price. It is understandable since the erratic nature of the pandemic and its generation of new strains hang over any forecasts like dark clouds. But clearly, in reviewing the possibility of a strong upside ahead by 2Q22 for Nagacorp, weighed against another black swan still in hiding, still makes an entry point in the stock with low risk and high potential yield now a sensible portfolio move.








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Howard J Klein
Global Gaming and Casinos Industry Specialist
Casino Business Review LLC
Consumer DiscretionaryThematic (Sector/Industry)Equity Bottom-Up

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strateg...