Nagacorp – Casino in Cambodia

It’s about learning

Thanks for the good comments in the previous post, a discussion I hope to keep going during 2017. It think it will take me quite a while to understand enough about such a complex field as DNA sequencing. And I probably wont feel comfortable to invest before I at least know a bit more. I’m sure this will be an important area for decades to come. What I find so enjoyable about stock picking and aiming for good returns, is that as part of the process I learn a lot about so many new fields. But no more talk about DNA today. Instead I want to talk about something totally different, which is a company fairly well know to me, but perhaps new for you? A company listed in Hongkong which runs a casino in Cambodia called Nagaworld.

Company overview

+ Casino Monopoly

+ Strong tourism growth in Cambodia

+ Successfully delivered on strategy historically

+ High dividend (70% payout ratio)

– Serious share dilution in the past

– Potential for future dilution from Russian casino project

– Uncertainty around future VIP volume

– Country risk high and risk of tax increases (currently at 5%).

Nagacorp has been listed for about 10 years on the Hong Kong exchange. It is an easy company to understand as their line of business is running one large casino (Nagaworld) in Phnom Penh, the capital city of Cambodia. When building the casino they convinced the local government to give out a monopoly agreement where nobody else is allowed to open a casino in Phnom Penh for a period of 50 years, currently there is 41 years left in that contract. That’s one heck of a moat for gambling in the city. Stock performance over the 10 year period has been good, with regular high dividend payments (total of 2.15 HKD over 10 years). The stock has suffered quite a lot from dilution, both to the majority owner that has backed the expansion of the casino (more on that later) as well as private placements that normally has been done at steep discounts (10-20% disc).


A play on Cambodia and travel preferences

Cambodia is incredible poor, average monthly salaries in the city is in the 150 USD/month range, well below Vietnam where people earn in the 200 USD range. The Nagaworld hotel/casino is so big that it’s revenue contributes a somewhat staggering 23.5% to the Cambodian tourism sector GDP and 1.26% to total Cambodian GDP. So analyzing futures prospects about Nagaworld is closely linked with future tourism for Cambodia. There are smaller casinos in southern Cambodia (where the ocean is). But Nagaworld is the only casino for tourist that visit the capital and/or going to the north to visit Angkor Wat, which is by far the most important tourist destination in Cambodia. For a first time tourist traveler in Cambodia, I would say 9 out of 10 is coming for Angkor Wat. I have myself visited the world heritage temples and it is definitely impressive, although I would not put it on top of anyone’s bucket list.

Given that people in general like to travel to countries where they feel that they get a lot for their money, I would say Cambodia is pretty high up on that list. If you also consider safety, weather (maybe somewhat too hot in Cambodia), food, Cambodia is ranking even higher to the competition of low cost travel destinations. This is also shown in the tourist data, where the number of visiting tourist has trippled in the last 10 years. The growth has slowed somewhat in later years, but is still growing at a healthy rate 5-10% per year. Without going through all the details of tourism (which can be found here Cambodia tourism statistics). It’s also the right type of tourist (for a casino) that has increasing visiting numbers. The number of visiting Chinese has increased with 16% over the last year.

There are three main routes for tourist to visit Angkor Wat.

1. Flying to Siem Reap, which is a small city next to Angkor Wat and flying here directly saves some time if the purpose of the trip is just to visit the temples.

2. Flying to the capital Phnom Penh, spending a few nights here and taking a bus up through the country and visit Angkor Wat.

3. First visiting Vietnam (Ho Chi Minh) and then transfer by land to Phnom Penh and potentially on wards to Angkor Wat.


As we can see from the statistics above there is healthy growth and the route through Phnom Penh is keeping a higher growth rate compared to Siem Reap. My guess is that the Siem Reap airport is closer to being saturated as it is a very small airport. Overall I’m bullish on tourism to Cambodia I think they will be able to keep up high single digit growth for many years to come, as it is one of few countries where Chinese people has a comparably much higher salary. As we will see later, another important group of tourist are the VIP players, or so to say high rollers. This I find harder to predict, as I don’t have as much insight into what destinations they prefer. From what I have managed to read, with the clampdown on excessive spending from the Chinese government, a lot of Chinese high rollers have moved from Macau to the coast of Vietnam. Casinos work very actively together with so called junket operators to bring in VIP players. In this arrangement there is a profit sharing between the junket operator and the Casino. This relationship with the junkets is very important for anyone running a casino in Asia.

Casino expansion

The Nagaworld casino has scaled up well and occupancy rates has climbed, in 2012 the decision was taken to expand the casino with a new building called Naga2. These two building were to be connected by an underground shopping walkway, NagaWalk. Instead of Nagacorp financing the project through capex this project was taken by the majority owner Chen Lip Keong. He funded the venture independently, via a special vehicle. Upon completion of the project, the properties was to be transferred to NagaCorp and the company will issue new shares and / or convertible bonds (see below about dilution). Just recently these projects were deemed completed, although the Naga2 hotel/casino is not fully up and running yet (to be fully operational during the year).

This expansion effectively doubles the casino size in terms of rooms and gambling space for tables and machines.


Source: SWS Research

Russian expansion

Another early stage project is an building of a new casino in Russia, in the same area as my other holding Summit Ascent Holding (A story about Asian gambling and how it came to Russia). Some analyst see this as an option with a positive PV. But I regard this project currently as neutral, there might be some future value in this project, but it also increases the risk, both in terms of project success, but also further share dilution to finance the project.

Share dilution

Private Placements

Since I have owned this company in the past, I lived through some private placements that pissed me off big-time. First time this happend was in April 2012, the stock was trading in the 3.50 HKD range and a PP of 214 million shares was made at 3.04 HKD, the stock dropped and traded even below that level for a while. Later the same year a smaller PP of 90m shares was made, at that time investor interest was stronger after strong stock performance, it was placed at a small discount 4.50 vs 4.43 HKD per share. The next year in March 2013 the company was at it again, the stock was now trading at 6.60 HKD and another 200m shares were offered at 6.05. The latest offering was made in August 2016, where 190m shares were offered at 5.00 HKD with the stock trading at 5.50 HKD the previous days. All in all being a long term investor through these offerings, has not been as beneficial as if rights issues had been issued to existing shareholders. This shows how bad small investors can be treated when the stock exchange rules gives management a lot of freedom to allocate shares to larger funds who can buy in with 10% discount to current share price, which obviously gives extra dilution for an existing shareholder. I find this as a big negative in the history of this stock and I expect that this behavior will continue in the future.

Majority shareholder convertible bonds

Another important factor of share dilution comes from the majority shareholder Chen Lip Keong, a Malaysian investor. As mentioned above he has financed the Naga2 expansion. When the ownership is now transferred to Nagacorp, the company as agreed issues convertible bonds to Chen Lip Keong, which are convertible at 1.53 HKD per share for a total of 1 881 million shares. This bonds are entitled to the same dividend as the ordinary shares. If converted it would increase the shares outstanding from current 2 460 million shares to a new total of 4 341 million shares. At the same time the conversion would give Nagacorp 2.88 billion HKD in cash. All this is highly hypothetical though, because converting the bonds would both financially be difficult for Keong, as well as force him to bid for the whole company as his shareholding would then increase over the limit according to exchange rules. He effectively including the bonds own 65% of the company. So all this is a clever way for Keong to own a majority of the company without invoking a forced bid for the whole company.

This project has obviously given Keong a larger ownership of the company for a very cheap price, again diluting the ordinary investor. The benefit has been that Nagacorp has been able to operate at a debt free basis and it has also moved the risk of project completion from Nagacorp to Keong. I don’t think the transaction has been fishy, but definitely more beneficial for Keong than the other shareholders.

Is bigger better?

So the new bigger Nagaworld + Naga2 complex, is it better for the shareholders than the hold casino? I would argue no, it would have been better for investors if the Naga2 was never built, but just continued milking the old Nagaworld complex, paying out nice dividends. This dilution has not been favorable for investors and that is also seen in the stock price, which peaked around 8 HKD and now trading at 4.40 per share.


I use the following conservative valuation assumptions:

Current Op Margin: +38%, decreasing to 30% in 10 years.

Revenue growth: 55% over the coming 2 years, accounting for the new Naga2 complex, after that 5% per year for 8 years. Terminal growth rate 1.9%.

Cost of Capital: 14%, after 5 years decreasing to 12% to account for country risk moderation.

Re-investments: 20% of Net Income

Tax rate: 10% – right now 5%, but the company have to negotiate the tax every year, its likely to go up.

I deduct cash from Present Value, including cash from Bond conversion, but also accounting for full dilution of bonds converted into shares.

–> This gives me a value of 4.84 HKD per share, with the stock trading at 4.4 HKD per share currently, the discount is not huge, but this I also regard as conservative assumptions.


Bullish scenario

Current Op Margin: +38% maintained indefinitely.

Revenue growth: 80% over the coming 2 years, accounting for the new Naga2 complex, after that 5% per year for 8 years. Terminal growth rate 1.9%.

Cost of Capital: 10%

Re-investments: 20% of Net Income

Tax rate: 5%

I deduct cash from Present Value, including cash from Bond conversion, but also accounting for full dilution of bonds converted into shares.

–> This gives me a value of 6.69 HKD per share

Also to consider is the 70% pay-out ratio for dividends, my current estimate of the dividend yield at current stock price, is about 5.2% annual dividend.

Initiating small position

It’s not an ideal margin of safety, but the stock is offering a very attractive dividend yield and still good prospects for further growth, I’m initiating a small position here at 3% of the fund, and willing to buy more if we see the share price around 4.00 HKD.




13 thoughts to “Nagacorp – Casino in Cambodia”

  1. Hi,
    Thank you for the informed and enlightened comments. I first bought into Nagacorp back in 2007 and added in on and off average price about HK$2. Saw it rode up to $8 and sold half of my stake around $7HKD. Then it went south. Yes I agree totally about the sharedilution thing. Bad habit of Chen. Would have made more sense to load some debt into Naga balance sheet instead of issuing shares and diluting the shareholders especially for the latest Naga2 project. I guess they want to brag about it being debt free to potential investors. I still own about 0.03% of the Company. I am thinking of selling out my remainder stake soon actually. The juicy dividend yield makes me hesitate though (look at my cost base!). Hope the dilution effect will be orderly. I do not see Chen making a mandatory offer as most likely the relevant approvals will be given. I foresee then the share price to drop way below HKD$4. My hope is that the earnings of Nagacorp will double after Naga2 opens and thus cancel out the dilutive effect of the new shares.
    I also do not agree with their attempted expansion into Russia. It is a different society with possibly confiscatory policies.
    Keep up the good work on this site!
    Best regards,

  2. Hey there. I own nagacorp at the about 4.64, early december, 2 weeks before the Naga2 convertible bonds were issued. I think it is a great business and great monopoly in Phenom Pehn.

    The problem I would agree is how the boss treats minority shareholders.
    Reading your article shows a lot of dilution practices I have missed in the previous years.
    How do we factor in private placement and convertible bonds dilution into our valuation? Say how much % we would lose if we hold the stock and the boss converts all the bonds?
    Im quite concern about this because I intend to hold long term. If the dilution continues so rapidly there would be no point even if this is a great business.

    As for the bonus for the boss i think it is still acceptable as it is about 2% of the yearly company revenue.

    I haven’t quite figure out why he wants issuing bonds to purchase his own companies.
    Profiting from the construction revenue? I have read somewhere the construction cost actually was about 10million USD higher than agreed amount in S&P, so its good for shareholders at this point. The thing is they did another PP just to cover extra cost for Naga2

    Please advice on the dilution thanks.

    1. Another point about the boss, he owns Facbind in Malaysia.
      The balance sheet has cash horde way more than Facbind market cap and management seems to prefer keeping cash to themselves. They have no interest to unlock low valuation nor to payback as dividends.

  3. Interesting article, I myself also own Nagacorp shares, avg price 4.90. I was not aware of the (scale) of the dilution (I know that this is a common practise amongst asian companies). Seriously considering exiting this position soon, I’m a value investor and the ordinary investor apparently is not the priority here.

    What do you guys think about Imperial Pacific, I’m considering this company but still have to do my due diligence, also the price moved up to fast

  4. I believe that part of the reason the market has not fully rewarded Naga for its future growth (e.g. Naga2 expansion in 2017+) and monopoly (you’d think those cash flows would be pretty durable) is related to the political undercurrents involved with a high profile company operating in a “regulated” industry within Cambodia.

    The new draft gaming bill being bandied about (I think it gets submitted in mid-2017?) isn’t helping b/c it could raise the tax rate on GGR by 4-5x (still low vs other countries but definitely a negative for cash flow NPVs) and raises the specter of more legitimate local competition. The local papers have pointed to the new draft gaming bill potentially opening the door to gaming inside future competitive integrated resorts at some point.

    On paper, Dr. Chen’s relationship with the ruling party (Cambodian Workers’ Party under Hun Sen) seems pretty air tight but I’ve heard chatter from political analysts that the gov’t seems to always have an eye towards twisting the sweetheart deal that was given to Nagacorp. There have been multiple rounds of rumors over the past 2-3 years of a rival Cambodian magnate surreptitiously building out gaming tables and electronic slots inside properties that sit right near the edge of Naga’s exclusivity zone in anticipation of “modifications” to Naga’s monopoly position from the regulators.

    There is also the issue of Naga management (mainly their revolving door of IR folks) who are constantly hyping the imminent backing/engagement with big junket operators. Since I first looked at this one back in 2013, I haven’t seen any of the major junkets really start to push meaningful amounts of VIP whales over to Naga. Given how much chip roll those type of whales can drop as well as the need for wealthy Chinese to be more discreet after Xi’s corruption crackdown, one would think Cambodia might be a valid alternative.

    I personally think the Vladivostok adventure also doesn’t help the valuation given the anticipated dilution to actually get it across the finish line. Layer on the confiscatory risk as well…no matter how friendly the Russians appear today, anyone who has invested in or done business with Russian companies in regulated industries knows how fast that situation can change. No shareholder wants to see “Nagacorp writes down Russian resort stake following .” For the record, I am not against Russian companies (or investing in Russia), but one needs to be aware of the higher risk premium involved when doing so under even the most benign of circumstances.

    1. Thanks for good comments!

      On the gaming tax, I think there is already a yearly negotiation where Naga pays more than the statutory rate, you can find it in the annual reports. That’s why I also in my assumption (base case) use a higher tax rate (10%).

      In regards to having a monopoly or not, I actually don’t think it would be such a bad thing if another casino showed up. Look at Macau, there is plenty of competition, but it also increases the attractiveness as a gaming destination. I read that a few of the big hotel (Ritz Carlton etc) are in the works of building their first hotels in the city, this should also be a positive for tourism that has money to spend.

      About junkets, I think its fairly well understood that Nagaworld offers what they call the “poor mans VIP”, meaning that the “highrollers” at Nagaworld are rather just a well off regular player in Macau. But yes, I would agree that it’s strange that more of them don’t show up at Naga. It seems for example they prefer to play in Da Nang in Vietnam. Perhaps (hopefully) also in Russia at my other holding (Summit Ascent), where the son of Stanley Ho must have the right junket contacts (that was the whole reason I invested in Summit Ascent). We will see when the next report is out, the last 2 months of data hinted that the whales had arrived in Russia.

      Agree on the Russian adventure, hence I did not add anything in my valuation on that.

  5. Unfortunately I do not know enough to comment about those two companies. Yes, there is a lack of English blogs covering HK stocks. Can you drop me email if you are based in HK? I may going there soon and would like to meet up over beer/coffee to talk stocks if you are up for it.

    1. Yes I’m based in HK you can reach me at globalstockpicking at the famous Happy to meet up 🙂

  6. Any gaming business in Asia is a good business. I think the main problem with Nagacorp is that the major shareholder, Chen is shortchanging the minority. Instead of using the listed entity to build the extension of Nagaworld, he sold shares to finance the construction under his private entity, only to sell it back to the listed entity. Given that the listed entity was producing good amounts of cashflow and was debt free, the only reason to do this was for Chen to earn a big profit from the project at the expense of minorities. Apart from the potential red flags you pointed out, Chen also has a performance bonus based on profit BEFORE tax. Personally I would require a greater margin of safety before investing in this company. I would also recommend Asian Godfathers as an interesting book on doing business in Asia.

    1. Yes I agree, Chen is the biggest problem, for an otherwise very interesting company. You are right I did not mention the performance bonus, which is an amount that is he deferring every year, although he can claim it whenever he wants. Well I was figuring that Chen now holding all those convertibles would focus the company on paying a big dividend, so I think the stock will hold at least around the 4 HKD mark, I might have been somewhat early in at 4.39 though.

      Will check out the book, but more importantly you seem to have started a very interesting blog! I struggled to find anyone seriously blogging/writing about HK listed stocks in English. Please do comment on my other HK holdings, like Coslight Technology and Summit Ascent Holding.

    1. Hi SEB,

      I was thinking if I could approximate it somehow, but decided not to. The share dilution will most likely come from financing the new casino in Russia, so that is an overhang. At the same time, in my valuation I do not attribute any value what so ever for this project. From Nagacorp’s perspective I’m quite sure they would not go ahead with the project if they saw it as a negative NPV project, so realistically I should attach some value to the project. For example I have seen analyst given it a value as high as 1 HKD per share. It’s not a totally un-reasonable expactation, when Summit Ascent holding who already have a finished casino in the same area is valued at 3bn HKD MCAP. With Nagacorp having 4.3bn shares (including conv bonds) and their planned casino project is much larger than Summit Ascent’s, one could argue that it’s worth that much, although I’m not willing to give the project that much credit.

      So I simplified things a lot, by letting the dilution and the value of the Russian projects cancel each other out.

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