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.




A story about Asian gambling and how it came to Russia

Asia and gambling

Since I first sat foot in Asia and started to meet more local Asians, I have been fascinated by how deeply ingrained gambling is in their culture. Sure we have all sorts of gambling in Europe and the US too, but what surprised me the most was how large sums of money the Asians were willing to part with for gambling (compared to their income). Someone with a monthly spending power (after costs) of 10 000 HKD could discuss with me that having a budget around 7-8000 for gambling over a weekend. That for me was unheard of except by more professional players.

Rise and fall of Macau

I guess nobody have been able to avoid the headlines from the Macau gaming sector and the mind-boggling turn-over figures and profits the companies were churning out, a few years back. Companies like Sands and Galaxy were the stars and for a short while Stanley Ho, the owner of Galaxy was the richest man in Asia. Well the Chinese leaders thought it went too far, and in their drive to rein in corruption, bribery and money laundering, it was suddenly not OK for the wealthiest Chinese to be seen in Macau, spending obscene amounts of money. This fairly small group of rich people, who stopped gambling, toppled the whole industry. On top of that the mainland stock market went from roaring bull to free-fall at the same time. Shares of HK listed Casino companies fell 60-70% from their peak levels and it all went very fast. Many investors who didn’t understand the dynamics of the sector must have been caught pretty bad in these companies. I talked to some US investors who obviously did not understand this deeply and jumped in just a few months before the peak. This is the first lesson in Chinese Casino gambling, a small group of VIP clients, can drive more revenue, than the whole mass market. But as they say, easy come, easy go.

Junket operators

The second lesson is understanding how the VIP segment of Chinese high-rollers are attracted through junkets. This is fairly shady business, although some junket operators are even listed on a stock exchange. What they do is providing a middle man between Casinos and VIPs, providing different “value adding services” (yes, I know what you are thinking of), arranging flights, pick-ups etc. For the interested reader here is a longer description: Junkets Factbox. But the most important service of a junker for VIPs is credit while gambling and the possibility to gamble for large amounts, and then settle potential debts back home in RMB in China. This is essential since the conversion of RMB to foreign currency is not freely available to mainland Chinese. This is then also a way of getting money out of China and/or money laundering. Casino and junket operators will probably not end up in ESG funds if we put it like that.

Russian Casino

Obviously there are other countries that wants to gain from the Asian’s willingness to gamble. Among them two that I studied, Cambodia and Russia. I spent the better part of a day updating myself about Nagacorp (3918 HK). Nagacorp run a casino in Phnom Penh, Cambodia. This is a company I know well, owned for a few years and followed since 2011 and I’m still interested in. But I’m waiting for an attractive entry point, which I think is in the 4-4.5 HKD range. I save that discussion for another time. Reading about Nagacorp I started to look deeper at their upcoming casino project in Russia. This then led me to another company, Summit Ascent Holding (102 HK) who have just opened a new casino in small scale in Vladivostok Russia. I found project and plans of the Russians to open this casino area very interesting. In fact it is somewhat similar to how Macau Cotai strip got developed. Or as Bloomberg asks, is Vladivostok the next Vegas (hardly but anyway interesting comments in the video): Putin’s Making a Big Bet on Building Vegas in Vladivostok

For research purposes I found this “boring” video more interesting, showing the plans for the casino resort area.

Summit Ascent Holding (102 HK)

Newly opened, small casino in Vladivostok Russia, yes, we are climbing out far on the risk ladder with this one. I have decided to take a small position (2% of my fund NAV) on today’s close in Summit Ascent Holding (SAH from now on). This won’t be a full analysis, but I will quickly try to work through why I invested. I needed to write such a long intro above, because it all ties together. Let’s start with the share-price.


The stock was hyped a lot a few years back, because the company is started by the son of Stanley Ho (richest man in Asia for a short while), who runs Galaxy, perhaps the most famous of the Macau casino giants. This is what it sounded like back then: Hong Kong Billionaire Lawrence Ho’s Summit Ascent Boosts Stake In Russian Casino. Well as we know, things usually take longer than investors have patience and the stock price fell sharply. Especially when the operations were up and running, and revenue was not showing any sharp increase. That changed dramatically with the latest semi-annual report, when the stock jumped 40% within a week.

Targeting Chinese

Although located in Russia, the obvious customer targets are Chinese. Gambling is banned in China and therefor Macau’s success. But it is far to Macau from northern China – and hence we have Vladivostok in a much closer distance. This would also be the case for Japanese gamblers, although initially it is probably not the operators main targets. Also perhaps the city is able to offer another type of lifestyle more long term, compared to overcrowded Macau, as can be seen in the video about the area.

Quick revenue increase last two months

This table shows the VIP turnover and the revenue it generates, as you see a sharp increase for the last two months.


This revenue increase does not show in the semi-annual figures yet (since it ends in June), but is only visible to the one that actually reads the full report. Here is the explanation:

“Our rolling chip business, targeting the Asian VIP market, has seen phenomenal month-on-month growth, vindicating our investment thesis that the Primorsky Krai IEZ is an ideal location to capture the significantly underserved gaming demand in Northeast Asia. Our strategy has been to start our rolling chip business using only casual junkets initially without fixed-room operators. This strategy is deemed necessary in order to preserve the bargaining power of the casino vis-à-vis fixed-room operators. Thus far, our strategy has been proven to be correct. This is evidenced by the fact that rolling chip turnover has been increasing on a month-on-month basis since the commencement of business in November last year and dramatically increased following the start of two fixed-room operators in late June 2016”

Investment case

  • The stock has been hammered and although a breakthrough has been shown in the figures, the market has not yet hyped the stock as before. Calculating on just current run-rate as of August for the Casino business, we are looking at a company valued around P/E 15-20.
  • I actually believe in this resort area as a whole, as long as Putin stands behind it, and it becomes a VISA free region, low tax and everything that has been promised. Build it and they will come!
  • The Ho family surely have all the right junket contacts, to bring in and focus on VIP players makes a lot of sense. The mass market will come when it is a big resort area with other activities. Also since it’s still somewhat no-no for Chinese VIPs to gamble in Macua, maybe they feel more comfortable in a very private setting in Russia with other high-rollers. I think we can see further growth from the numbers in the table above
  • The company has another project phase in their plans, although we do not know the success of the whole resort area or any build outs, it has at least some optionality value.

Obviously very high risk. But in my view worth a 2% position, since this can easily double or triple within the next year(s).