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NagaCorp (3918 HK): tweaking estimates; raising PT on new valuation paradigm

November 20 2012

Trends remain very strong - Following Naga’s release of unaudited operational highlights through the end of 3Q12 in early October, we believe gaming volume trends have remained at elevated levels on a y/y basis – especially in the higher-margin mass market and slot machine segments. Our revised estimates, which are detailed below, reflect these trends. Despite strong gaming volumes, we think that following the early October announcement Naga may have experienced a run of bad luck (low hold rate), which under normal circumstances might result in an estimates revision. However, we think that any weakness due to hold rate will likely be offset by the USD10mm upfront fee to be paid to the company in conjunction with the new slots deal at Saigon Palace.

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NagaCorp (3918 HK): Gives a peak into 3Q12; mass still booming

October 08 2012

Recap - Tonight NagaCorp reported unaudited 9 month (through September 30) gaming volume performance data for its three primary segments. After adjusting for 1H results, we note that both the slot floor and mass market table games experienced significant gaming volume growth during 3Q12, which was above our implied expectations. We believe these high-margin segments continue to be driven by a host of factors that suggest this growth is sustainable. VIP rolling chip volume was softer than our expectations, although likely a function of Naga’s low base of customers (on a relative basis compared to regional casinos in markets like Macau) which can result in monthly / quarter volatility based on such things as frequency and timing of visits.

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NagaCorp (3918 HK): Strong 1H12; growth story intact

August 09 2012

1H12 recap - Yesterday, NagaCorp reported 1H12 results, which was followed by today’s conference call, with continued strength demonstrated across all of its operating segments. On an apples-to-apples basis (excluding the benefit of an $8mm upfront fee from one of its slot providers late in 1H11 that pulled revenue forward), revenue increased 27%, to $132mm. EBITDA of $65mm, was up 37% (ex-1H11 upfront fee) and compared to our estimate of $68mm, the $3mm variance owing to increased administrative and other operating expenses as the company ramps up its regional marketing efforts and takes on additional staffing for new gaming and non-gaming space at NagaWorld. Finally, net profit of $52.4mm was up 38% (ex-1H11 upfront fee), with reported EPS of 2.52 US cents.

Valuation –a discount to peers on superior growth - NagaCorp, while beginning to close the valuation gap, is trading at an average discount of ~30% discount to its Asian peer group average based on consensus 2013 EV/EBITDA estimates. Please see Figure 4 below for a detailed valuation matrix. Clearly there are a number of factors that are built in to this discount: country risk, limited liquidity, the stock is small cap, it is a single-asset story (for now) and investors are generally unfamiliar with NagaCorp.

As Naga continues to execute on its strategy and consistently records superior growth relative to its Asian and global gaming peers, we believe the company should trade closer to parity with its peers. While these peers are currently trading at 7.7x consensus 2013 EV/EBITDA, they have historically traded one or two multiple turns higher forward earnings (approximately 9x +). At 7x 2013 earnings, this would imply a share price of $5.00 for Naga, or 25% upside to its current price (HK$4.02) plus dividend yield of 8% based on an expected 60% payout ratio.

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NagaCorp (3918 HK): Raising estimates on continued strength in fundamentals

June 07 2012

We are raising our 2012 estimates for NagaCorp on continued strength across all three primary business segments: slots, mass market tables and VIP tables. We believe that all three segments are experiencing sequential volume growth, driven by increased headcounts and increased yield per customer. Importantly, we think further upside exists as recent marketing and technology initiatives take hold (e.g. Naga’s luxury bus service to Ho Chi Minh and the implementation of a Bally casino system), visitation to Cambodia and Phnom Penh continues to grow, and as Naga expands its VIP segment. Naga’s luxury bus service has only been operating for about two weeks, which we think will have a notable impact on 2H12 results.

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NagaCorp (3918 HK): Positive outlook on 2012; many initiatives to drive growth

December 05 2011

We recently met with NagaCorp management during a visit to the company’s NagaWorld Integrated Resort in Phnom Penh, Cambodia. We remain excited about the Naga story, with what should be 70%+ EBITDA growth in 2011 and many levers in place to drive double-digit EBITDA growth in 2012 (and beyond).

Physical expansion - There are a number of current projects underway, as well as future projects that we believe management is contemplating, that will be key drivers of growth. Although NagaWorld’s main casino (ground floor / mass market) is capacity constrained, the property does have expansion space available on the first floor. In time for Chinese New Year (begins 23 January 2012), a new gaming/entertainment venue, Naga Rock Café, will open with about 250 slot machines and 12 table games. This space will be accessible via existing escalators and elevators to the 1st floor, as well as a dedicated exterior entrance currently being built. Also in time for Chinese New Year, Naga we believe Naga will open about half of the 220-room hotel block currently under construction with the balance likely opening in February. Looking ahead, we believe there are likely other mass market expansion opportunities that could be realized in currently under-utilized space as demand warrants.

Focus on increased visitation - Despite spiking inflation rates in Vietnam (~18% in 2011), Vietnamese visitation to Naga continues to increase (Vietnam represents Naga’s biggest customer base). To date, visitors from Ho Chi Minh typically take a privately-operated coach bus to Naga with Naga compensating the tour operator on a per-head basis. Beginning next year, Naga will start operating its own luxury bus fleet (five coaches) painted in Naga livery catering exclusively to its premium mass customers in Ho Chi Minh. Further, we expect the company to begin operating a similar number of buses locally, catering to local foreign-passport holding customers. Finally, and what we believe should likely be a 2H12 contributor, Naga will likely open dedicated sales offices in various major metro areas in Indochina. As we’ve noted on multiple occasions previously, we believe the Thai market could represent significant upside for Naga as it begins to penetrate this relatively wealthy and untapped market. We would expect any push into Thailand to be somewhat delayed due to the recent flooding.

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NagaCorp (3918 HK): Highlights from today’s conference call with NagaCorp management

June 14 2011

Project cost - The combined development costs for TSCLK and NagaCity Walk are expected to be US$369mm, comprised of $275mm for TSCLK and $94mm for NagaCity Walk. These cost estimates were arrived via valuation estimates from several professional firms, with an average of US$2,047 per square meter (in today’s dollars) in expected costs for the development. This is largely inline with current regional development costs of similarly scoped projects.

Dilution of minority shareholders and expected returns - Upon conversion of the convertible bonds issued to Dr. Chen (or share issuance at his option), minority shareholders will be diluted by approximately 42% (to 21% of shares outstanding, down from ~37%). It is important to note that the terms of the agreement between NagaCorp and Dr. Chen will only allow for the conversion upon completion and delivery of the project to NagaCorp. As such, shareholder dilution will immediately begin to be offset by increased earnings generated from the project.

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NagaCorp (3918 HK): Announces transaction / major growth plan

June 13 2011

No longer a single-asset story - NagaCorp announced this evening a transaction with its CEO that will ultimately lead to major (and much needed) growth of the company’s footprint in Cambodia. Within a 3 to 5 year period, two projects will be developed next to the existing NagaWorld, which in turn will be acquired by Naga upon completion. The projects include 1) NagaCity Walk, a two-level pedestrian mall (linking the old and the new), and 2) an integrated-resort complex, which will include hotel rooms, retail, MICE, car park, and what we believe could ultimately be additional gaming space.

Transaction details - The two projects, valued at $369mm, are being developed by Naga’s CEO, Dr. Chen, who will bear all development, financing and cost inflation risk. It is important to note that Naga has no commitments as part of development process. Upon completion, Naga will acquire the projects from Dr. Chen, in exchange for shares / convertible bond (US$369mm at HK$1.84 / share, or ~1.56bn shares). Dr. Chen, via the SPVs detailed in the announcement, already holds the development parcels and has incurred US$31.2mm in costs on a life-to-date basis (land, master-planning and other development fees). Public float, now at 37% of shares out would go to 21%. When considering the scope of the new projects and future demand (continued tourism growth to Phnom Penh, increased penetration into Vietnam, plus marketing initiatives into Thailand and other ASEAN countries, etc.), we believe this project could double corporate-level EBITDA (in today’s dollars).

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NagaCorp (3918 HK): Gives a peek at 1H11; inline with our Street-high estimates

June 07 2011

Provides 1H11 performance update - This evening, Naga provided key financial metrics for the first four months of 1H11 (through April 30). The company noted revenues of $64.9mm, which implies 1H11 revenues of $97.4mm and inline with our Street-high estimate of $97.4mm. Net profit through April 30 was $21.6mm, which run-rates to $32.4mm as compared to our estimate of $31.8mm.

Upside potential to 1H11 - The metrics provided today would not include the $8mm one-time license fee that will ultimately be recognized by Naga from its new 3rd party slot machine operator. The one-time fee is not recognizable until Naga delivers the floor space to the vendor, which hasn’t happened yet (currently on track for delivery before June 30). Assuming Naga delivers the space prior to June 30, the company would recognize the $8mm in one-time fee revenue as part of its 1H11 results, which would therefore imply $105mm+ in revenues at the current run-rate.

Slot floor performing above our expectations - Naga also noted average win / day of $234 (prior to the revenue share split with its 3rd party operators). This compares favorably to our estimate of $220. Although we do expect slot win/day to be diluted after the opening of the new slot space (largely based on the likely lower traffic-volume of the area given its location above the main gaming floor), we are very encouraged by the current run-rate. Further, the future implementation of the company’s new slot-system (marketing, accounting, etc.) and TITO (cashless) gaming initiatives should drive win/day nicely over the medium term.

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NagaCorp (3918 HK): Strong growth story; very attractive valuation

February 15 2011

Shares of NagaCorp were down 5.3% today, and are down 13.0% from their November peak, which we feel is unwarranted given continued solid results and compelling growth. Detailed herein, we believe Naga has several levers to its growth story, none of which have been negatively impacted by broader political (Thailand) or economic issues that have weighed on shares recently. Naga’s valuation remains very attractive, at just 5.1x 2011 EV/EBITDA, which compares to its Asian peers at 12.5x and its closest geographical peer Genting Malaysia at 6.7x.

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NagaCorp (3918 HK): First thoughts on 2H10 results; beats expectations; analyst day and conference c

February 14 2011

Naga reported 2H10 revenues of $82.2mm (+52% y/y), which compared favorably to our forecast of $73.2mm (+12% to our estimate). We estimate Naga’s 2H10 EBITDA at $31.8mm (+52% y/y), and inline with our forecast. Finally, EPS was 1.23 US cents (+84% y/y) and about 5% above our forecast of 1.17 US cents.

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