What's new
On June 30, Cambodia’s Ministry of Health （MOH） issued aMemorandum of Understanding （MOU） allowing NagaCorp（3918.HK） to reopen its VIP tables and slot machines businesses inCambodia from July 8. Upon opening, Naga will be required to followa full set of preventive measures on the casino floor, includingtemperature checks, mandatory mask-wearing, disinfection of publicareas, social distancing at food & beverage outlets, social distancingat gaming areas （max three seats per table）， and isolation rooms.
Comments
We view the reopening of Naga （the first in Cambodia after theCOVID-19 pandemic） as a first step towards the recovery of theCambodian gaming industry. Currently, foreign visitors to Cambodiaare required to: 1） undergo a COVID-19 test and await results atspecial facilities; and 2） undergo a 14-day quarantine if anyaccompanying passengers test positive.
On July 3, a draft of Cambodia’s new casino control law was passedin cabinet and will be discussed in Parliament. We await furtherclarity, especially on the new gaming tax rate.
According to data from the Center for Asia Pacific Aviation （CAPA）， airtraffic from China and South East Asia to Phnom Penh has graduallyrecovered since early May. We believe expatriates and businesstravelers have begun to return to Cambodia, and that Naga couldbenefit from this, as well as from local demand.
In 2019, Naga’s VIP and Slots revenue contributed 72% and 9% oftotal gross gaming revenue and 41% and 18% of gross profit. Webelieve a recovery of business operations in 2020 to pre-pandemiclevels remains challenging. A recover in regional tourism remainshampered due to: 1） ongoing travel restrictions in Cambodia; and 2）tourists facing further restrictions after returning to their country oforigin （many nations still mandate a 14-day quarantine）。
Valuation and recommendation
We lower our 2020 and 2021 revenue forecasts 49% and 16%, andlower our 2020 and 2021 EBITDA forecasts 64% and 18%, onlater-than-expected business resumption. We maintain anOUTPERFORM rating and TP of HK$10.80, implying 11x 2021eEV/EBITDA and 10.3% upside. The stock is trading at HK$9.79, or 11x2021e EV/EBITDA.
Risks
Worsening of COVID-19; tightening of capital controls within theregion; uncertainty over new gaming tax.