2Q19 results beat our estimates
NagaCorp announced 1H19 results: revenue was US$892m （+22%YoY, +20% HoH）； EBITDA was US$328m （+41% YoY, +18% HoH），beating our estimate by 5%. Earnings beat on: 1） strong growth inVIP rolling （+38% YoY） and Mass （Buy-ins +32% YoY, Bills-in +29% YoY），coupled with high Mass win rates （1H19: 19.3% vs. 1H18: 17.6%）； and2） a better revenue mix gravitating towards Mass that improved theoverall EBITDA margin （+5ppt YoY）； offset by 3） US$11.8mn one-offstaff performance incentives.
Trends to watch
Naga3’s capex confirmed at US$3.5bn. The company says this will be50% financed from NagaCorp’s free cash flow and cash balance, and50% from NagaCorp’s controlling shareholder Tan Sri Dr. Chen. Permanagement guidance, Naga3 will have a GFA of 544,801sqm. Itsfacilities include: the Naga3 complex linked with NagaWorld andNaga2; up to 800 new gaming tables （vs. 463 currently）； up to 2,500new electronic gaming machines （vs. 2,250 currently）； and five newhotels offering 4,720 rooms （vs. roughly 1,700 rooms currently）。
Foreign direct investment （FDI） into Cambodia soars. FDI intoCambodia has more than tripled from 2016’s US$697mn to 2018’sUS$2,511mn. Business-related visitation to Cambodia grew 148% YoYin 5M2019 to 567,357, with 77% coming from China. Chinesefactories, along with capital and expats, are being relocated tolower-cost Cambodia, especially its capital Phnom Penh, where Nagaoperates casinos monopolistically.
Some industry observers contend Sihanoukville, Cambodia’s port city,could divert gaming demand away from Phnom Penh. We do not findthis theory concerning as we believe Sihanoukville lacks basicinfrastructure to serve patrons, has few direct flights, and that PhnomPenh is often the first arrival point when visiting Cambodia.
Financials and valuation
We raise our 2019e/20e revenue and earnings forecasts by 1%/2%and 2%/3% on the earnings beat. We lift our target price by 1.6% toHK$13.00, implying 10x 2019e EV/EBITDA and offering 16.7% upside.
Risks
Uncertainty over Naga3; uncertainty over the new gaming tax;slower-than-expected ramp up of Naga2.