Deep-dive 2023-8: NagaCorp (3918 HK)
Cambodian monopoly casino operator getting ready for a wave of Chinese tourists
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NagaCorp (3918 HK - US$3.5 billion) is a Hong Kong-listed casino operator based in Cambodia’s capital city of Phnom Penh.
Its two “NagaWorld” casinos with 480 gaming tables and 3,700 slot machines, and hotels with 2,700 rooms and related commercial properties.
What makes NagaWorld unique is that it has a monopoly on running casinos in a 200km radius of Phnom Penh, lasting until 2045. And its casino license lasts until 2065. The regulatory environment has also been exceptionally favourable, with low gaming taxes of just 4-7% compared to up to 40% in Macau. Cambodia also offers visas on arrival to mainland Chinese visitors.
NagaCorp was founded by a Malaysian national called Dr Chen Lip Keong, who used to be the economic adviser to Cambodia’s current Prime Minister Hun Sen. NagaCorp, under his control, compounded earnings per share at a 15% rate for over 15 years until COVID-19 hit in early 2020.
The bull case is that tourism to Cambodia growing on a secular basis. Only 7 million people visited Cambodia in 2019 compared to 40 million in Thailand. Cambodia has a close relationship with China, often described as a success case in China’s Belt and Road Initiative. And a new airport will open in Phnom Penh in 2025, enabling greater tourism.
Roughly half of Cambodia’s foreign direct investment (FDI) comes from China. And that FDI is likely to grow now that two major trade agreements have gone into effect. Sell-side analysts at CICC found an 83% correlation between China's FDI into Cambodia and NagaCorp’s gross gaming revenue.
On the other hand, Cambodia’s casinos have often been used for money laundering and capital flight, including from China. For example, before 2019, hundreds of thousands of Chinese operated online casinos in Sihanoukville, targeting mainland customers. Most of those have now been shut down.
While NagaWorld doesn’t operate any online casino, it has worked with so-called junket operators in the past, who lend money to VIP customers to buy chips, and those chips can then be redeemed for foreign currency. The VIP customer in China then settles the debt with the junket operator in Renminbi.
NagaCorp’s profits fell precipitously during COVID-19.
One major reason was the border closures, given that only foreign passport holders can gamble at NagaWorld.
Another reason was China’s crackdown on capital flight through the use of junket operators. For example, it shut down Macau junket operator Suncity, which used to operate VIP rooms at NagaWorld.
NagaCorp is also building a third casino nicknamed “Naga 3”. This casino will cost US$3.5 billion and have a floor area of half a million square metres - a massive investment.
There are also questions about how Naga 3 will be financed. 50% of the capex will be taken the ListCo. The remaining 50% will be financed by the controlling shareholder Dr Chen, who will, upon completion, inject the asset into the ListCo.
Many wonder whether a US$3.5 billion project is needed, provided that most of NagaCorp’s revenues are from VIP customers anyway.
And when it comes to VIP customers, I’m not sure that the Chinese VIP business will ever return to its 2019 level. Even with conservative assumptions, the P/E ratio will probably end up somewhere around 9.6x, below its historical multiple of 11x and below the peer group’s 18x.
On the positive side, China’s borders have now opened up. And group travel to Cambodia has also resumed. So expect far greater foot traffic to Cambodia in the next few quarters. And Dr Chen is buying shares actively in the open market, suggesting optimism for the future.
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Deep-dive 2023-8: NagaCorp (3918 HK)