Friday, March 29, 2024
 
Columnist
Martin Hennecke
 
NAGACORP
HKEx Stock Code : 03918 
 
Corporate Profile
The Group is engaged principally in the management and operation of a hotel and casino complex known as NagaWorld in Phnom Penh, the capital city of Cambodia.

Business Review - For the year ended December 31, 2012

The ongoing European sovereign debt crisis, fiscal cliff overhang in the United States (U.S.), intensifying disputes between China and Japan, and the slowdown in China's economic growth concluded the year 2012. Despite the volatile economic conditions in much of the developed world, the Group recorded a healthy growth in all its business segments, thanks to the continued strong growth of the Indochina (Cambodia, Laos, Myanmar, Thailand and Vietnam) economies, where the Group's operations are based.

Worldwide international tourist arrivals grew by 4% to 705 million in the first eight months of 2012, compared to the same period in 2011, according to the latest United Nation World Tourism Organization (¡§UNWTO¡¨) World Tourism Barometer. The UNWTO further projects full-year numbers to hit the historic 1 billion mark. More importantly, tourist arrivals in Cambodia continued to significantly outpace worldwide tourism growth by recording an increase of 24% to 3.2 million visitors in the first eleven months of 2012, compared to the same period in 2011. Vietnam (22%), Korea (12%) and China (9%) comprise the top 3 countries of all tourist arrivals and collectively account for 43% in 2012, growing at 25% year-on-year (Source: Ministry of Tourism, Cambodia (¡§MOTC¡¨)). The increase in visitation from these gaming-centric countries is a prime driver for the Group's continued business growth.

Mass Gaming ¡V Public Floor Gaming Tables and Electronic Gaming Machines (¡§EGMs¡¨)

The Group recorded a 34.4% (public floor gaming tables) and a 28.1% (EGMs) increase in business volume in 2012, on the back of strong tourist arrivals' growth to Cambodia. The Group's strategy of segmentising the mass market based on player profiles and playing habits also led to incremental business volume in this segment. For example, NagaRock, a premium mass gaming area which opened in February 2012, targets the higher-end public floor players who look for a more relaxed and entertaining gaming environment, with higher table limits. NagaRock proved to be a successful casino cell concept and laid a strong foundation for the Group's premium mass gaming business in 2012.

The proven success of the Rapid1 gaming area in 2011 also led to the launch of the Rapid2 gaming area in June 2012. The launch of rapid gaming areas is one of the strategies to further segmentize the mass gaming players by moving the lower end players from gaming tables to rapid gaming machines with lower limits, driving incremental business volume in the overall mass gaming segment.

NagaRock ramped up successfully during the year and contributed significantly to the overall increase in mass gaming revenue. In the process, it became increasingly popular among the VIP players, resulting in some volatility on the public floor gaming tables revenue. As a result, this led to a lower win rate for the Group of 22.4% during the year compared to 24.1% in the previous year. Despite the slight decrease in win rate, public floor gaming tables continued to record a healthy increase in revenue of 24.4% to US$77.9 million. It is however imperative that the Group continues to develop its premium mass players as maturity of the premium mass gaming areas will eventually reduce such volatility.

In the EGMs segment, despite the Group increasing the number of gaming machines during the year, the WUD increased from US$229 to US$236, resulting in an increase in revenue of 28% to US$87.9 million. Win rate on the EGMs has also maintained at a healthy 11.5%.

The Group launched its first loyalty programme, called the Golden Edge Rewards Club, in January 2012. To date, the programme has successfully captured more than 22,000 members. The loyalty programme has enabled the Group to better understand its members' profiles and create targeted marketing efforts. This will enable the Group to focus on player development initiatives to increase visitation frequency and play-time.

In May 2012, the Group opened its first office in the business district of Ho Chi Minh City to facilitate the sales and marketing efforts in Vietnam. In conjunction with the Vietnam office opening, a luxury bus service from Ho Chi Minh City to Phnom Penh was also launched, as part of the Group's joint efforts with the MOTC to promote tourism to the Kingdom of Cambodia. These efforts resulted in an increase in Vietnamese visitation to NagaWorld, contributing to a growth in both gaming and non-gaming segments during the year. In December 2012, the Group launched another premium mass gaming area called Saigon Palace with 9 gaming tables and approximately 120 EGMs, to cater to the needs of the Vietnamese clientele.

The Group's Bangkok marketing office commenced operations in September 2012 and is making inroads into promoting NagaWorld to the Thai gaming market. Given the 7 daily direct flights from Bangkok to Phnom Penh and higher spending power of Thais (vis-a-vis other Indochina tourists), Thailand offers an opportunity for premium mass gaming.

Junkets & VIP

Rollings increased by 16.9% to approximately US$3.8 billion during the year, as a result of further market penetration into the Group's traditional VIP markets of Malaysia, Indonesia, Thailand, China and Vietnam. The Group continued its strategy of positioning NagaWorld as a low-end VIP destination, offering relatively high rolling commission rates while providing quality VIP player experience. The relatively low cost entertainment options in Phnom Penh have proven to be attractive for this category of VIP players.

Despite the Group's conservative credit policy implemented since 2009, the junket segment has been experiencing a steady increase in number of players and business volume, whilst minimising gaming volatility. This translated into a 18.4% increase in revenue to US$94.9 million, while win rate maintained at 2.5%. However, due to the relatively low gross profit margin from the Junket and VIP segment of 37%, this segment of the Group's business accounts for only 17% of gross profit. This is analysed in Table 2 of this announcement.

To further develop the Junkets and VIP segment, the Group will emphasize on win-win formulas and turn the junket operators into casino owners so as to drive rollings and broaden its customer base. Such strategies would enable the Group to increase its table limits, while limiting its exposure and managing volatility.

Non-Gaming Revenue ¡V Hotel, Food & Beverage and Entertainment

The Group's strategic marketing efforts in key target markets aim to provide internationally recognised services to both gaming and non-gaming patrons and continue to carve NagaWorld a unique niche in an increasingly competitive landscape. In February 2012, the Group opened 100 hotel rooms and in November 2012, added another 100 rooms, bringing the total room inventory to approximately 660 rooms. Despite the increase in room inventory, the average occupancy rate increased to 83%, compared to 78% in 2011, a reflection of the Group's strong growth trajectory. As a result, the Group's non-gaming revenue increased by 46.3% to US$18.0 million in 2012.

At the 2012 Vietnam International Tourism Exhibition held in Ho Chi Minh City in September, NagaWorld won 3 awards, namely Best Leisure Resort in Cambodia, Best Integrated Entertainment Destination in Cambodia and Best 5-star Hotel of the Year in Cambodia. This recognition in the tourism industry reinforces NagaWorld's position as a prime entertainment destination for the Vietnamese and the Group is well-poised for further market developments in Vietnam and the region.

The leading position of NagaWorld has successfully attracted world-famous luxury brands such as Cartier, which opened a flagship boutique in NagaWorld in August 2012, and Piaget, which opened a flagship boutique in October 2012. This is the first time that these luxury brands are entering Cambodia and the Group believes in enticing more luxury brands to enhance the high-end retail experience of its patrons. The Group also plans to add Rolex and another 2 luxury boutiques in 2013. This will further solidify NagaWorld's overall appeal to both the VIP and mass gaming segments.

Business Outlook - For the year ended December 31, 2012

The Indochina region has been somewhat insulated from the economic slowdown in the developed world, as a result of vibrant organic growth within the region. With a combined population of more than 240 million (Source: International Monetary Fund (¡§IMF¡¨)), the Indochina region represents a significant market for the Group and the Group believes that its growth in the coming years will be in line with the continued prosperity of the region.

The IMF estimates that the Indochina countries will record an average real Gross Domestic Product (GDP) growth of approximately 6.4% in 2012 and 6.6% in 2013. This will enable the Group to experience continued growth in the coming year, since both Thailand and Vietnam prohibit their citizens from gambling in their countries. In September 2012, the Vietnamese government completed the draft gaming decree, prohibiting the local Vietnamese to enter local casinos (Source: VietnamNet Bridge, 2 September 2012), which bodes well for the Group.

In Cambodia, economic growth also remains strong. The World Bank (WB) maintains an economic growth forecast for Cambodia of 6.6% for 2012 and 6.7% for 2013, driven by 4 key sectors: manufacturing, tourism, agriculture and construction. From 2004 to 2012, foreign direct investments (¡§FDIs¡¨) into Cambodia grew by a compounded annual growth rate (CAGR) of approximately 26%. The Ministry of Economy and Finance estimates that FDIs into Cambodia will grow by approximately 13.3% to US$768 million in 2012, coming from China, South Korea and U S. In particular, China has pledged to invest US$ 2.5 billion in Cambodia in 2013 and both sets of leaders from Cambodia and China have agreed to boost bilateral trade to US$5 billion by 2017 (Source: Cambodian Business Review, January 2013).

On the political front, during Cambodia's third commune elections held on 4 June 2012, the ruling party, Cambodian People's Party, achieved an overwhelming victory, winning 72% of the total 11,459 commune seats (Source: Phnom Penh Post). This demonstrates the strong support for the ruling party by the people of Cambodia. The Group believes that the favourable macro political economic environment in Cambodia and the Indochina region as a whole would continue to drive FDIs, tourism and better business sentiments in 2013.

On the back of strong tourism growth in 2012, the MOTC estimates that tourist arrivals into Cambodia will reach 7 million by 2020. The Association of Southeast Asian Nations (ASEAN) Summit hosted by Cambodia in November 2012 having successfully won praises from leaders around the world would certainly raise Cambodia's international profile in attracting future investments as well as tourist visitation. As a result, the Cambodian Government has decided to put into action its plans of improving accessibility and increasing the number of weekly direct flights into Cambodia.

In 2012, 3 airlines commenced operations to Cambodia and several existing airlines introduced a total of more than 40 new weekly flights into Cambodia, bringing the total number of weekly flights to approximately 360. In addition, the Cambodian Government is targeting to bring in new flight routes from Doha, Manila, Jakarta, Dubai and India's main cities. The existing Phnom Penh and Siem Reap international airports would also have their capacities doubled to house 5 million passengers each, by 2015. Furthermore, a new international airport in Kompong Chhnang (90km from Phnom Penh) is scheduled to be completed by 2030 (Sources: Cambodia Business Review, January 2013; Phnom Penh Post). NagaWorld, being the leading tourist destination in Phnom Penh, will naturally stand to benefit from all these developments.

In line with the strategy of the Group to further penetrate the Vietnamese market, Saigon Palace (another casino cell concept) opened in December 2012. Apart from ramping up the operations of Saigon Palace, the Group plans to open the Aristocrat Private Club (a high-rollers VIP club) in 2013, targeting quality, higher-end public floor players through higher table limits.

The Group anticipates that the junket business strategy (as discussed in earlier paragraphs), of emphasizing win-win formulas for both NagaWorld and junket operators, will be a key driver in the growth of the junket business. In this regard, the Group is in discussions with several regional operators to move forward on this basis. To support the more discerning VIP players, NagaWorld had added 5 luxury gaming suites in January 2013, and another 2 targeted for opening later in 2013. These suites provide individual private gaming space for higher-end junket players who seek ultimate comfort, convenience and privacy. These luxury VIP suites are the first of its kind in the region and will be a prelude to Naga2, which will feature 50 of such suites upon completion. To further upgrade NagaWorld's VIP gaming facilities, the Group is planning a luxurious new Junkets & VIP gaming area, integrated with entertainment and restaurants on the rooftop of the existing Pool Block.

As part of the Group's long term strategy to continue growing the mass market and VIP segments, the independent shareholders' approval in January 2012 to acquire Naga2 from the controlling shareholder marked a significant milestone for the Company. Naga2, with a total built-up area of 97,620 square metres, will feature over 1,000 hotel rooms, 50 luxury VIP suites, up to 18,738 square metres of retail space, a 4,000 seating capacity MICE/ theatre facilities and additional gaming space (up to 300 gaming tables and 500 EGMs). This future expansion will cater to the growing demand for gaming and entertainment facilities in the region. In November 2012, the official ground breaking ceremony for Naga2 was held and piling works have since commenced. In addition, the opening of Cartier and Piaget (first luxury chains in 50 years), and other soon-to-be-opened luxury boutiques set the stage for a leading retail centre and successful Naga2 retail development. The completion of Naga2 within the next 3 to 5 years, together with the presence of these luxury brands, will solidify NagaWorld's position as a leading integrated gaming and entertainment destination in Indochina.

Source: Nagacorp (03918) Annual Results Announcement
Chairman Timothy Patrick McNally Issued Capital (shares) 2,282M
Par Value USD 0.0125 Market Capitalisation (HKD) 15,746M
 
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