Earnings Call: H1 2018

Jul 26, 2018

Good evening. You are listening to Naga Corp. 20 18 Interim Results Overseas Investor Conference Call. I would like to now introduce Kevin Nyland, Vice President, Investor Relations to begin the call. Good evening, everyone. Welcome to Naga Corp's 2018 Interim Results Overseas Investor Conference Call. Although you are in a listen only mode, there will be an opportunity to ask questions. Please follow the instructions given at that time if you would like to ask a question. For your information, this call is being recorded for replay purposes. Now let me introduce our senior executives on the call today, Philip Lee, Executive Deputy Chairman and Sean Tan, Chief Financial Officer. Also present on the call today are my colleagues from our Investor Relations team. Now I'll turn the call over to Sean Tan for the presentation. Hi, thank you, Kevin. Good evening or good morning to everyone. Thanks for joining our call. Let me begin with the presentation. I'm pleased to inform that we had a record year for our interim results since IPO in 2006. Gross gaming revenue increased by 85 percent to USD 713,000,000 while VIP revenue soar by 163 percent to US553 million dollars Let's move on to Slide number 1. We are seeing consistent steady growth in GGR, EBITDA as well as net profit. Although the reported net profit after tax increased by 20%, net profit after tax should have increased by close to 100% if we remove the impact of 2017 EGM 60,000,000 assignment of rights, which the company has not opted in first half twenty eighteen. So on the apples to apples comparison, net profit after tax should have increased by almost double. Moving on to Slide 2, the 85% increase of gross gaming revenue was contributed by all segments across the board. Mass market table buy in increased by 53%, while ejuan built in increased by 22% with a total Bison of over US1 $1,000,000,000 in the first half of twenty eighteen. VIP market QGR increased by 163%, outpaced the 117% increase in VIP rolling, reason being first half of twenty eighteen win rate was 3.3%, which is higher than 2.7% recorded in first half twenty seventeen. Moving on to Slide 3, over the past years, mass market segment has been our pillar of strength and but after years of carefully planned strategic VIP market development, we are finally seeing success in the VIP market segment. With the increase of 163% in VIP revenue, VIP revenue now contributed about 75% of our total revenue in first half twenty eighteen. Just one thing to note that if you look at the table on Slide 3, it shows that EGM revenue decreased by 41%, but again removing the impact of the $60,000,000 assignment of rights EGM assignment of rights that we have not opted for in first half twenty eighteen, EGM revenue should have increased by 43%, supported by increased 22% increase in bills in as well as win rate improved from 7.7% to 8.1%. Turning to Slide 4, despite the significant increase from VIP market contribution, around 50% of Nagacorp's gross profit remains from the mass market. So gross profit contribution remains well balanced despite the significant increase of VIP revenue. Turning to Slide 5. With the solid financials results, our market cap grew by 18% during the 1st 6 months of 2018. In fact, if you look at the recent market close today, our market cap actually grew to US4.6 billion dollars Turning to Slide 6, we had a record year for our Cambodia VIP market. So the main reason for the significant increase of 100 and 63% in VIP GGR was as below. Number 1, it's mainly because of the offering of world class quality of Nagatul, which commenced operation in November 2017. Niigatou has seen received very positive feedback from VIP customers, junket operators, bankers, analysts, etcetera. So with that, we are actually having more operators from diversified geographical regions apart from the traditional Southeast Asian junket operators. For instance, Suncity actually opened their fixed junket hall in March 2018, while JV operators between Macau Junket Operators Venus Group as well as Malaysian Junket Huang Group, they commenced their fixed junket haul in June 2018. So with more and more top tier junket operators working together with Nagacorp, we are seeing higher end VIP players coming to our casinos. Occasionally, we open up our table limits for selected customers up to $1,000,000 per game. But having said that, we continue to adopt conservative gaming policy, diluting the risk by offering a little bit more incentive to our junket operators as part of our risk management policy. Apart from that, we're also seeing increasing related visitation especially from China. Again, this is a direct benefit towards our gross gaming revenue. Last but not least, our world class competitive unrivaled VIP services that I believe is something that other regional casinos can't offer or couldn't compete on that end. Just before we turn to Slide 7, I wish to highlight that if you look at the table down there on Slide 6, gross profit from VIP segment actually increased by 146% from just $56,000,000 to $138,000,000 So this tell us that the significant increase in terms of VIP rolling, it's not wasn't achieved at the expense of our VIP segment GP margin. GP margin remains fairly stable at around 25%. Turning on to Slide 7, mass market tables, again we had a record year of buy ins of over $550,000,000 The 50 53% increase of Bison was driven by capacity increase, world class quality Nagao 2 offering as well as steady inflow of visitation from Southeast Asia and East Asia, especially from China. So if you look at first half this year, the growth was 53 percent that again far outperformed the past 5 years compounded annual growth rate of just merely 18%. Turning to Slide 8, mass market tables. This is a very interesting slide in the sense that as you can see, we have been increasing capacity, but at the same time also driving higher return per table. Two important points that I want to emphasize. Number 1 is, if you look at how Nagasu's table yield per day has been performing, just within a short period of time of 6, 7 months after commencement operation in November, the table yield per day sorry, the daily table yield of Nagasu mass market table increased from $3,500 in January 2018 to $5,700 in June 2018. And in fact, the US5700 dollars in June, it's about 50% higher than what we achieved in existing Naga 1. So imagine that if we spend a little bit money refurbishing and upgrading of Naga 1 infrastructure and hotel quality, I believe that there is a significant group of uplifting the table yield that we currently have in Nagahone. Turning to Slide 9, mass market EGM. Bilsin, similarly we had a record year in first half of twenty eighteen. Billsin increased by 22%, while win rate increased or improved from 7.7% to 8.1%. Turning to Slide 10, similar to what we saw on the table yield of Nagasu, EGM located at the Nagasu, the win per unit per day also ramping up very rapidly From just $114 back in January 2018, it increased by 46% to US166 dollars per unit per day in June 2018. Turning to Slide 11, our mass market segment continues to benefit from increasing visitation. For the 1st 4 months in 2018, international arrivals increased by 14% to 2,200,000 visitors. Of course, one of the highest growth is coming from China, whereby the Chinese arrival increased by 79% to over 600,000 visitors and China actually accounted for 30% of total arrivals in the 1st 4 months of 2018. Turning to Slide 12, we continue to share our success with our shareholders by declaring dividend paid out of 60% amounted to close to US110 million dollars So with the share price of US7.60 dollars per share, that gave an annualized dividend yield of 5.1%. And if you look at since the beginning since 2006 till today, we actually declared and paid out close to about US1 $1,000,000,000 of dividend. Turning to Slide 13, in terms of share price performance, it is very obvious that Daiya Karp share price has outperformed Macau Pure significantly, including recent past couple of months of tough equity market environment, the share price of NAGA Corp continued to hold up pretty well. Slide 14, it's self explanatory. So let's move on to Slide 15. In terms of growth drivers, we have emphasized it over again and again. It's all about confidence, confidence, confidence. So we are actually seeing continued increase of confidence in Cambodian political and economic climate as well as social orders. So we always mention about political stability lead to economic prosperity. So with the stable political and economic situation, we are seeing increase of tourism and visitation, particularly from China. That actually directly benefit the footfall to our combined Nagao complex. Of course, on top of the macro perspective, there are also increasing towards the company increased confidence towards the company, especially post commencement operation of Nagatou, which is a transformational product. So with today market cap of over US4.6 billion dollars and shareholders' funds of US1.4 billion dollars coupled with our successful bond offering, US300 $1,000,000 of bond offering in May, I think we are we have successfully increased the confidence from VIP players as well as junket operators towards our companies. So combining the appeal, strong appeal on the NiGA2 product offering as well as our financial strength, we are able to attract top tier higher end VIP players as well as junket operators. Despite the past success and after the bond exercise, the current debt of EBITDA is around 0.8, but we continue to position ourselves to maintain the debt level to below 2x of debt to EBITDA. Turning to Slide 16. This again, this is a very interesting slide in the sense that it shows there is a strong correlation between Niiga to hotel occupancy as well as the mass gaming revenue. What this information tells us is that the people, the customers who stay in Nagatou tend to have higher participation in terms of gaming activities. So it actually tells us that, Nagatou, it's very attractive and the preferred world class gaming integrated resorts in Cambodia. Turning to Slide 17. Cambodia has been the economy sorry, the GDP growth has been growing at 6 percent to 7% in the past years. So based on IMF World Economic Outlook dated April 2018, Cambodia's GDP is expected to grow at 6.9% in 2018 as well as 6.8% in 2019. More importantly, if you look at the first bullet point, GDP per capita of non pan residents has increased from just a mere US759 dollars in 2,009 to US3800 dollars in 2017. Moving on to Slide 18. We are continuing seeing the increase of weekly flights international weekly flights from the region into Cambodia, namely, Phnom Penh and Siem Reap. So if you look at today, we have 738 weekly flights. That it's a significant increase from just mere 386 weekly flights back in December 2013. Moving on to Slide 90. In terms of foreign direct investments, China continues to contribute the bulk of the Cambodia's foreign direct investment. In fact, China accounted for 51% of all foreign direct investment to Cambodia for the past 3 years. So that actually leads to greater number of expat population as well as higher spending in patronage to our properties. The subsequent slides show you guys some of our new product offering in the first half of twenty eighteen. Starting on with Slide 21, this is our brand new VIP gaming hall located on level 21 of our VIP tower. Slide 22 as well. Moving on to Slide 23, this is our brand again brand new Presidential Suite. Slide 24, Presidential Suite, May 5 as well, 26, 27 is our penthouse suite 28. Slide 29, as I mentioned before, Suncity opened up their VIP hall in March 2018 and they've been contributing significantly to our VIP rolling in the first half of twenty eighteen. Slide 30, Huang Venus VIP Hall that commenced operation in June 2018. In fact, we expect more significant results coming from Huang Venus in second half twenty eighteen. That concludes my presentation. I think we can open up for Q and A. Thank you. And we will now proceed to our question and answer session. Please feel free to raise any questions you may have. Our first question will come from Charlie Gushi with Kailos Capital. Hi, thank you very much for the rundown and congratulations on an excellent report. I just had a quick question. Now that the debt is has been reduced in terms of its relationship to your EBITDA, does that point to new growth initiatives or major growth initiatives over the next, say, 12 to 18 months? And if so, can you give us some indication on scale and Hi, Charlie. Hi, it's Philip. I think maybe I missed it, but that did not reduce. We took up our first debt, which is bond offering, about $300,000,000 in May of this year. What we meant from the slide is that on a trailing 12 month basis, our debt to EBITDA ratio is 0.8x, whereas our committed policy at a point of time when we issue the bond is 2x. So that demonstrates that if there is a need, we can go further into the debt market if needed. But of course, we will not issue any debt unless we have very strong reasons for the utilization of the proceeds. As far as expansion, as you mentioned, within the next 12 to 18 months, if you look at the numbers that we've generated for the first half of this year and also in terms of occupancy and capacity of Nagar II and Naga I, we foresee that we'll be running short of the capacity in the next couple of years or so. So we are already planning for another 3, but it's still very much in the early stage, and we will make the necessary announcements when the time is right for us to do so. So yes, we are indeed planning for the expansion. But that could possibly be 3 to 4 years down the line before it opens. Thank you. Our next question will come from Chelsea Collin with Aegon. Please go ahead. And Chelsea, your line is open. Hi, thank you for the call. My first question is just related to the junket operators. I know it was your plan to expand the number of junkets, and it looks like you have. But can you provide a little bit more color on the contribution and the number of junkets that you have for Naga? And secondly, can you also elaborate a little more on the EGM assignment rights decision? And what the outlook is going forward on that? I think let me first address the assignment right, EGM assignment right. As mentioned, if you look at Slide 10, we are seeing a very fast ramp up in terms of the win per unit per day on those EGM located in Nagatou. So I think the assignment rights decision, it remains an option of the company. But I think there's no rush after witnessing the fast ramp up of the win per unit per day of the EGM in Naga 2. Yes. And with regard to the junket expansion, right now, we have we think we have a quite good balance of junket operators operating out of Southeast Asia as well as East Asia, namely targeting the Chinese market. And we are looking at signing on a couple more. And this will be top tier junk food operators out of Macau. And we should see increasing numbers of these operators in the second half of this year. But as to the identity and number of these operators, We will talk about it when it actually happens. We don't want to talk about something to find the future. But our focus is on getting the operators in who can really deliver numbers like what we experienced for Suncity. Think it's public knowledge, Suncity themselves have made some sort of press release that they hold in Naga sorry, in Naga 2, they actually achieved a rolling of in excess of $1,000,000,000 in 1 month. And we have seen even further improvement to that. So we're quite happy with the performance and our positions that we will look for more operators of quality of this nature. So the next 6 months, you should expect to see us signing on a couple more of them. Thank you. We'll go next to Charles Cartledge with I have a couple of questions for me. You raised the $300,000,000 bond in May. And the reason for raising the bond was specifically to help your VIP business. So May I can't remember what date in May you raised the money, but perhaps you could comment on within this very strong Q2 for VIP, to what extent does that reflect the capital that you raised in the bond? And given that it would have fallen into the second half of the quarter And what impact do you expect it to have in the future given your conversations with John and Hyrelev? Thank you. Charles, thanks for the question. Yes, the RMB300 million bond that we raised in May was for 2 purpose. 1 the first purpose is $150,000,000 to refurbish NAKA 1. And as Sean pointed in his presentation just now, the disparity in terms of win per table per day on NAGA 1 and NAGA 2, where in a mere 6 months, the win per table per day for Naga2 outstrips Naga1, win per table per day despite having been open for so many years. I think it reflects the quality of Nagavans needs to be upgraded in order for us to derive more gaming revenue from that program has started and will be complete by end of next year. Then the other $150,000,000 as you pointed out has been earmarked for the VIP business. It's not to fund the VIP business. It's meant to be kept on the books as a demonstration of our ability to take on the big players and big operators. And the effect of that $150,000,000 that we raised for the VIP has not really very much flow through into our 1st half results, given the timing of that issue. So now in talking with new operators, the top tier operators sort of Macau, with the backing of the financial strength of about in excess of $300,000,000 cash on our balance sheet, it makes things easier. It also allows our operators to penetrate the market further. We already have got the quality of the product in NAGA 2, and now we've got the software and the SOD firing power. So we are confident that in the second half of this year that we expect to be able to achieve that continued trajectory on the VIP side, keeping our fingers crossed. Thank you. Thank you. Can I just ask a follow-up? You mentioned, Sean mentioned, the refurbishment program in NAGA-one. Could you just elaborate on, is that just the rooms or is it a gaming store? And on either of those, will there be you'll have to obviously close part the gaming store while you reserve it. So will that be done on a kind of rolling basis or are you going to how do you attempt to do that so as not to impact the talent business there? Secondly, what is the I haven't worked the numbers, but we can see the difference in the roll and or the win per day per table. So I'm wondering what an approximate payback might be? Charles, the refurbishment of Nagar 1 will be the hotel rooms plus our common public areas. So that's where the $150,000,000 will go. The refurbishment program also will be done in stages so as not to interrupt our operations. You will appreciate, I mean, that we have opened Naga 1 for some years already. But given the volume of schedule refurbishment of Naga 1. We are able now to do a scheduled refurbishment of Naga 1. That program will take us towards the end of next year, and it will be done in stages so as not to affect our operations. As to the effect on the win per table, we have our internal projections expectations and but of course, we don't want to give any forward numbers. But the objective of the refurbishment is definitely to bring in the quality players to Naga 1. We have always positioned Naga 1 to be our flagship property given the size of the rooms. The room sizes in Naga 1 is about 38 square meters per room versus only about 27 square meters in Naga 2. So we definitely want to bring Naga 1 back to the level where it's our flagship property. Thank you. Thank you. We'll go next to Sarah Hartshorn with Rainbow Fund. My question was whether your CapEx requirements over the next 3 years? I understand the $150,000,000 to refurbish Naga 1, but could you discuss Russia and where those monies will be coming from? All right. Thanks, Sarah. You're right. Our major CapEx cost would be $150,000,000 for Naga 1. On an annual basis, our maintaining CapEx comes in at about $30,000,000 to $40,000,000 a year. And for Russia, the way we structured our Russian development is that it's been, in a sense, ring fenced that the development cost is funded by the contractor, and we have obligation to pay the contractor or an option to pay the contractor 7 years from the start of construction. So that was start of construction was about a year ago or year and a half ago. So we have something until 2023 to fund to fully pay back the $300,000,000 expected development cost of the Vladivostok project. And that will come up from the expected to come up from the operations of the Vladivostok property itself. So really CapEx cash requirements out of Naga existing operations is 0 for the Russian So it's mostly CapEx requirements within Cambodia itself. Okay. Thank you. Do you mind mentioning who the contractor is for the Russian property? Yes. The contractor is a Chinese contractor and he's been a contractor for many, many years in Cambodia. And because of that, we have been able to work out this development funding from him. We'll take a follow-up question from Charles Cartledge with Sloane Robinson. Hi, Philip. Obviously, very good to see the rebound in margin at the EGM, the mass market EGM. Could you just share with us some commentary around that? You went from 7.7 to 8.1. I don't have my spreadsheet in front of me, but it used to be, I think, 10. And it's been coming down for a few years. And I believe part of the reason has been that you'd have some EGMs on the floor, which were not fully under your control because you sold the rights to those EGMs and that has a deterioration in mix and maybe some EGMs are competing with other EGMs. But maybe you could share with us what happened and what changed? Thanks. Yes, Charles, because you've been with us for so long, yes, yes, right, absolutely, that our win rates on the each end is to be about 10%. And really, it's because of the change in mix of machines, not to do with the assignment of rights or the percentage given to the operator because their inventory is at the gross level. So really, the mix of machines did contribute. You see, for our You see for our EGMs, electronic gaming machines, there are 2 types. 1, which is the traditional slots and the other which is the electronic table games, the ETGs. So on the traditional slots, you're able to set a return to player. So you set a certain percentage and you get a theoretical win rate from there. Whereas on the ETG, it's like a table game. The win rate is significantly lower like the baccarat table where the win rate about 2.3. So it's a matter of the blend of the machines and the volume of day, whether it's on the traditional slot or on the ETGs. So over the past couple of years or so, we've seen more preference towards the ETGs, and we have also opened more ETGs relative to the slots. But what we have done over the past 1 year or so is that we have started moving up the return to player on the slot machines. And because of this, we are seeing the marginal creep up of the win rates. So that is still very much our target to move that up even higher than existing 8.1%. And let's see how it goes in the second half of this year. But we are definitely moving that up progressively. And just a follow-up rather than get back in the queue. I see I'm reading some sell side notes that there's evidently no decision on tax rate yet. Could you give us an update on your latest what you're hearing and all of one analyst wrote it was due before the year end 2018. Is that correct? What are you hearing? Hi, Charles. It's Sean here. I think looking at the forthcoming general election on 29 July and after the election, it's going to take at least about 2 months to form the government. I think from our perspective, we think that conservatively, we are expecting the passing of lower perhaps first half of twenty nineteen. So that's from our personal opinion and what we have observed so far. Thank you. And as to the rate, I believe there's some committee and indications had been, but it might be in the mid single digits. Is that still the case? Is it still a committee? Might it still be a committee after the election? And might it still be mid single digits? Yes. I think, Charles, this is within our within our expectation. I think it's roughly around single digit of GGR. Yes, that's right. When you say roughly around single digit, is that mid single digit or could it be higher than that? Mid single digit, sorry. Okay. A blended mid single digit, yes. Thank you. Thank you. Our next question comes from Xianxiaoyou with Everbright. Hi, management. Thanks for taking my question. Congratulations for another very successful quarter. My question is how is China's contribution to the visitations and rolling or did you guys could you please give us some color on that? Hi, it's Sean here. I think in terms of headcount, first half this year, in the perspective of VIP segment, Chinese contribution, it's around 38% based on Heiko. So but from the mass market side, it's pretty hard for us to quantify that, but the VIP numbers is what we can provide. There appears to be no further questions at this time. In the call. All lines may now disconnect. Thank you.