NagaCorp offers bright spot in Asia casino market, expansion to drive growth

On an overcast morning in Cambodia's capital, Phnom Penh, the country's flagship casino looks less familiar than it did a year ago as construction obscures the entire front entrance.

NagaWorld, which began as a boat moored on the Mekong River 20 years ago, is undergoing a major revamp, which is expected to help accelerate growth at one of the brightest spots in Asia’s casino industry.

In the nine months to end-September, Hong Kong-listed NagaCorp posted a 47 percent increase in gross gaming revenue to $399.8 million, according to preliminary results. VIP revenue was up 52 percent, while mass revenue gained 43 percent.

For Q3, GGR was up 58 percent to $144.4 million, boosted by an almost doubling in VIP numbers, though mass revenue was also strong.

“We expect momentum to continue as new initiatives bear fruit,” analysts at Morgan Stanley said in a note commenting on the results. The firm has an overweight rating on the stock.

NagaCorp says it’s seeing strong growth from Vietnam, China and South Korea and hopes to capitalize on the downturn in Macau to further penetrate the Chinese market. It has been pushing to improve ties with North Asian junkets, which are seeking to diversify operations outside Macau.

In July, the company said it reached an accord with Jimei International to operate at least seven gaming tables, while it also has a more casual arrangement with Sun City Group.

“The group offers better commercial terms to junket operators and agents as a result of NagaWorld’s low cost structure,” NagaCorp said in a recent filing to the stock exchange.

The contribution from the junkets was already evident in Q3 results, analysts say, though they add that going forward the terms paid may not be so generous.

“Overseas junkets continued to contribute more than 70 percent of total volumes. The company plans to scale down its revenue sharing with junkets to 70 percent (max) in early 2016 and this could improve margins,” Morgan Stanley’s note said.

Compared to other operators - such as Genting Malaysia - who have a long track record in attracting Chinese customers, NagaCorp is still in the early days, says Union Gaming analyst Grant Govertsen.

“That said, [Naga] are clearly showing positive growth as it relates to Chinese customers, which is a rarity these days relative to places like Macau, Singapore, and Korea.”

“Without exception, Naga has been the one Asian gaming story that continues to generate strong earnings growth while many other regional gaming markets are mired in decline or limited growth,” Govertsen said in a recent note.

However, despite the headline focus on the China VIP, analysts point out that the bulk of Naga’s growth story is from South East Asia, from IndoChina and also from at home, where strong foreign investment is leading to a growing expat community.

Michael Ting, an analyst at CIMB said one of NagaCorp’s strengths is that it does not need to rely on Chinese tourists, as a lot of its revenue growth is driven by VIPs in Asean. Naga’s VIP is also more akin to Macau’s premium mass clients, who have been less affected by China’s anti-corruption drive.

China VIPs are estimated at about 20-30 percent of total revenue, with Malaysians seen at about 49 percent and 10 percent from Singapore.

“Also Naga is coming off of a low base for VIP so the numbers look good,” Ting said in an email.

Brokerage firm Nomura cited NagaCorp’s management as indicating that more than 60 percent of the casino’s customers are Cambodians holding foreign passports.

“Management is not concerned about mainland China’s anti-corruption campaign. It believes their VIP clients, who gamble much less than the typical Macau VIPs, are just upper-middle class people who are not the target of China’s anti-graft campaign,” said Nomura.

NagaWorld has a monopoly in the Cambodian capital, which means no casino can operate within a 200 kilometer radius for at least another 20 years. As a result, for many gamblers it’s the only casino in the country worth gambling in. The picture is changing, but the alternatives are mostly ramshackle operations along border towns that offer limited entertainment and accommodation and are difficult to access.

Tourism arrivals rose by 5 percent to just over 3 million in the first eight months of this year, with Vietnam making up 20.8 percent of the total, China 15.2 percent, Korea 9.2 percent and Laos 7.4 percent.

As of the first six months of the year, NagaWorld had 262 gaming tables and 1,600 Electronic Gaming Machines. In May this year, the company reached an accord with investors to place up to 300 gaming machines in NagaWorld, for which it received a $40 million fee.

Unlike operators in Macau, which are trying to diversify their business mix to offer more non-gaming facilities to attract mass market customers, Naga’s gaming and non-gaming revenue mix has not changed significantly, said Govertsen.

“Although I suspect you’ll see a larger shift once NagaCity Walk and Naga2 open (with notably more non-gaming revenue than before).”

Non-Gaming revenue decreased by 6.1 percent to $10.0 million, in the first half "mainly due to the increase in number of rooms sold to junket operators at a lower room rate, and the temporary loss of rental income from five existing luxury boutiques as a result of the temporary closure of the hotel main lobby area for NagaCity Walk’s construction."

The group is spending $369 million on expanding the resort, with the addition of so-called Naga2, which will double capacity. The second phase has a total built up area of about 110,105 square metres, which includes the NagaCity Walk, which will include luxury retail and public space.

The TSCLK Complex will feature about 1,000 hotel rooms, 38 luxury suites, a multi-purpose entertainment theatre and additional gaming space of up to 300 more tables and 500 electronic gaming machines, according to the company’s Web site.

The company said the expansion will position the Group as the leading integrated gaming and entertainment destination in Indochina.