company report nagacorp (3918 hk)

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page

Equities Hong Kong/China Initial Coverage Company Report

NagaCorp (3918 HK) Trawling for Bigger Fish We initiate coverage of NagaCorp with a Buy rating and target price of HK$7.90. 2013-14 marks a transitional period for the company and we believe it is making astute moves in building VIP growth through new initiatives, bolstering its mass market presence and expanding beyond Cambodia. All these should become earnings growth drivers in the long run. We forecast a 20% net profit CAGR over FY14-16E.

Igniting VIP business. NagaCorp has introduced a revenue-sharing program for junkets that effectively increases their commission from 1.7% to 2%. The new junket incentives should help bring in more serious, higher rolling gamers. We forecast a 25% CAGR for VIP rollings, boosted by additional VIP capacity and the new VIP initiatives attracting junket clients from Macau from 2015.

Bolstering mass market presence. Growth in the mass market should be driven by higher visitor numbers and rising spending by mass market players, supported by economic growth in Indochina. To cater for the mainland Chinese market, NagaCorp is working to improve travel services from the PRC to Cambodia. We expect growth in buy-ins to continue at a rapid pace, with a 17% CAGR.

Naga2/3 and entry into new gaming jurisdiction. Naga2 will double NagaCorp’s capacity and additional traffic should fuel earnings in the long term. NagaCorp also plans to enter a new gaming jurisdiction, Russia. Since the Russian project is still at the negotiation phase, we do not factor it in our target price, though we do expect it to become an additional long-term earnings driver and help NagaCorp diversify its growth profile.

Valuation. Our target price is based on a sum-of-the-parts (SOTP) valuation of NagaCorp’s properties. We apply a 10x EV/EBITDA to NagaWorld’s FY15E EBITDA and 10x to Naga2’s FY19E EBITDA. We discount the enterprise value of Naga2 at 12.4% and have already factored the coming share dilution into our target price. We initiate coverage with a Buy rating and a target price of HK$7.90.

Investment Summary FY-end Dec 31 2012 2013 2014E 2015E 2016E

Turnover (US$ m) 278.8 344.9 410.3 503.3 596.7

Growth (%) 24.6 23.7 18.9 22.7 18.6

Net Profit (US$ m) 113.1 140.3 153.0 186.0 219.2

Growth (%) 22.9 24.0 9.1 21.6 17.9

EPS (US cents) 5.4 6.3 6.7 6.9 8.2

Growth (%) 22.9 15.7 6.8 3.5 17.9

PER (x) 15.3 13.2 12.4 12.0 10.2

OCF/Share (US cents) 6.3 6.7 7.3 6.2 7.8

PBR (x) 4.3 3.2 3.0 2.8 2.8

EV/EBITDA (x) 11.5 9.2 8.1 6.7 5.4

DPS (US cents) 3.8 4.3 4.7 4.9 5.7

Yield (%) 4.6 5.2 5.6 5.8 6.9

Sources: Company, CER estimates

18 August 2014

HK & China / Gaming

BUY Share Price

Target Price Upside

HK$6.48 HK$7.90 21.9%

(As of 15 Aug 2014)

Eva Yip, CFA

(852) 2530 8226

[email protected]

52-week price range (HK$) 6.18-8.80Div yield % 5.19

Latest Key Data FF no of shares (m) 1,330FF (%) 58.29FF market cap (HK$ m) 8,62012M daily turnover (HK$ m) 39.6912M volatility (%) 37.8012M Hi/Lo (HK$) 6.18-8.80PEG 2014-16E (x) 1.19 RoAE 2013 (%) 28.01 PBR 2014E (x) 3.02 Net debt/equity 2013 (%) Net cash

Performance (%) 1M YTD 12M

Absolute 0.5 (20.7) (5.1)Relative to HSCEI (5.9) (23.3) (13.8)

Major Shareholder (%)

Tan Sri Dr Chen Lip Keong 41.71Free float 58.29

Price Chart (HK$) Turnover (HK$ m)

0.60

1.60

2.60

3.60

4.60

5.60

6.60

7.60

8.60

9.60

09/2011 05/2012 01/2013 09/2013 05/2014

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

NAGACORP LTD HSI

Sources: Bloomberg, CER estimates

HK & CHINA / GAMING

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 2

Investment Thesis

Competitive franchise, well placed to benefit from growing Asian market

NagaCorp has a competitive business franchise compared with global listed casino stocks. Competitive advantages include monopoly operations and low operating costs. It is the only integrated casino-hotel operator within 200 km of Cambodia’s capital Phnom Penh and this status is guaranteed up to 2035, with no limit on the number of gaming tables. Costs are low due to the long amortization period for gaming licenses, low staff costs and a favourable tax rate which is equivalent to 2% of gross gaming revenues.

Figure 1: Cambodia offers NagaCorp a favourable tax rate

0%5%

10%15%20%25%30%35%40%45%

Cambodia Korea(foreigners

only)

Philippines Singapore Malaysia Macau

Mass VIP

Sources: Companies and CER

In addition, Phnom Penh is only a short flight from highly populated countries such as Vietnam, Thailand and China. This unique geographical position should help it capture the growth potential of Southeast Asia’s gaming market. The number of casinos in the region is set to increase as more governments pass gaming legislation in a bid to boost tourism, but fast-growing local economies should ensure plenty of demand.

Figure 2: Cambodia is close to populous countries and with increasing accessibility

500 km

Kuala LumpurPhnom Penh: 28 flights/week (1 hr, 50 mins)Siem Reap: 10 flights/week (2 hrs)

Singapore Phnom Penh: 29 flights/week (2 hrs)Siem Reap: 10 flights/week (2 hrs, 10 mins)

BangkokPhnom Penh: 56 flights/week (1 hr, 10 mins)Siem Reap: 42 flights/week (1 hr, 10 mins)

Ho Chi Minh CityPhnom Penh: 21 flights/week (45 mins)Siem Reap: 35 flights/week (1 hr, 20 mins)

HanoiPhnom Penh: 12 flights/week (3 hrs, 20 mins)Siem Reap: 35 flights/week (1 hr, 45 mins)

Hong KongPhnom Penh: 10 flights/week (2 hrs, 35 mins)Siem Reap: 4 flights/week (2 hrs, 45 mins)

TaipeiPhnom Penh: 10 flights/week (3 hrs, 25 mins)

Phnom Penh

SeoulPhnom Penh: 14 flights/week (5 hrs, 25 mins)Siem Reap: 14 flights/week (5 hrs, 25 mins)

BeijingPhnom Penh: 8 flights/week (7 hrs, 5 mins)

ShanghaiPhnom Penh: 7 flights/week (4 hrs, 15 mins)Siem Reap: 6 flights/week (3 hrs, 50 mins)

GuangzhouPhnom Penh: 14 flights/week (2 hrs, 45 mins)Siem Reap: 10 flights/week (2 hrs, 50 mins)

NanningPhnom Penh: 2 flights/week (3 hrs, 35 mins)

ManilaSiem Reap: 3 flights/week (2 hrs, 45 mins)

YangonPhnom Penh: 2 flights/week (1 hr, 25 mins)Siem Reap: 2 flights/week (2 hrs, 10 mins)

VientianePhnom Penh: 10 flights/week (1 hr, 20 mins)Siem Reap: 4 flights/week (2 hrs, 55 mins)

Thailand

LaosMyanmar

Philippines

China

Taiwan

Vietnam

Malaysia

Indonesia

Singapore

South Korea

North Korea

Japan

Sources: Company and CER

HK & CHINA / GAMING


Igniting VIP business

NagaCorp had previously adopted a conservative approach to its VIP business, with low maximum bets and limited credit terms. The company revamped its VIP strategy after fundraising in 2013 helped strengthen its balance sheet.

First, it has introduced a revenue-sharing program for junkets that effectively increases their commission from 1.7% to 2%, much higher than the 1.25% in Macau. The new junket incentives should help bring in more serious, higher rolling gamers, particularly Chinese VIP players. This market is currently under-represented at NagaCorp, reflected in 90% of 1H14 rollings coming from Southeast Asia. The company is close to signing agreements with eight Macau junket operators, pending compliance checks with internal policies. Once these agreements are in place, the company’s new VIP initiatives should start bearing fruit in 2015.

Figure 3: NagaCorp’s VIP segment vs. Macau VIP segment

US$ Macau

commission model

NagaCorp revenue sharing

model

NagaCorp old commission

model Comments

Rollings 100 100 100

Gross gaming revenue (GGR) @ win rate of 2.85% 2.85 2.85 2.85 Theoretical win rate for VIP business

Junket commission 1.25 2.00 1.70 Macau: 1.25% cap on VIP rollings NagaCorp: 70% of net win/revenue new initiatives; 1.7% of rollings under old scheme

Casino profit before gaming tax 1.60 0.86 1.15 NagaCorp shares more profit with junkets

Gaming tax 1.11 0.04 0.04 39% of revenue for Macau and 1.5% for NagaCorp

Casino profit 0.49 0.81 1.11 Assumes no operating costs, such as F&B

Junket sharing of GGR (%) 43.8 70.0 59.6 Junkets have more incentive to bring in currently underserved higher-quality players


Second, maximum bet per hand for VIPs has been increased from US$24k to US$200k, which should increase the pool and help mitigate volatility in the win rate. The theoretical win rate for VIP business is 2.85%, but NagaCorp recorded win rates of only 2.3-2.5% over FY09-12 with a rebound to 2.9% in FY13 and 3.6% in 1H14. Furthermore, although gross gaming revenue shifting towards VIP will increase commission costs and lower blended margin, the effect on the bottom line could be offset by a significant increase in volume. Even after its shift towards VIPs, NagaCorp’s EBITDA margin should remain higher than those of Macau casino operators.

Figure 4: FY13 EBITDA margin comparison across regions

0%

10%

20%

30%

40%

50%

60%

NagaCorp Singapore Malaysia Macau Philippines

Sources: Bloomberg, companies and CER

HK & CHINA / GAMING


NagaCorp is looking for higher-quality players, but its strategy emphasises mid-range VIPs, looking for a shoal of big fish rather than a handful of whales. Such a strategy should limit exposure to the types of VIP risks prevalent in other gaming markets since even with the increase in maximum bet they are equivalent only to Macau’s premium mass market. Unlike Singapore and Macau operators, NagaCorp does not require a very high check-in to enjoy VIP services.

Figure 5: Quarterly VIP rollings trend

0

200

400

600

800

1,000

1,200

1,400

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

(US$m)


To cope with an anticipated increase in VIP patrons, NagaCorp is upgrading its facilities and is scheduled to complete its new VIP terminal by the end of 2014. The company aims for the new facilities to give players a unique experience. The new 47-table VIP hall was completed in July 2014 and a VIP rooftop area with 16 tables will be finished in 4Q14. Four new VIP private gaming suites with eight tables will be added in 2015. In addition, at the end of 2013 NagaCorp hired a new chief operating officer, who had previously been president of Las Vegas Sands’ properties in Macau and had helped the leading US casino operator establish a firm presence in the enclave. His experience should prove invaluable in executing the junket business revamp.

Figure 6: NagaCorp expansion pipeline

Planned additions

NagaWorld at end 2012

NagaWorldat end 2013

NagaWorld expansion:

2013-15

Naga2 (est. 2016 completion) Total 2013-16

growth

Gaming tables 138 172 63 200-300 435-535 153-211%

Table split VIP: 57 Mass: 81

VIP: 83Mass: 89 VIP: 63 N/A VIP: 146

Mass: 89 N/A

Electronic gaming machines 1,470 1,543 200 500 2,243 45%

Hotel rooms 660 700 N/A 1,033 1,733 148%

VIP private gaming suites N/A 7 4 50 61 771%

Retail space (sq m) 381 381 N/A 13,248 13,629 3,477%

MICE/Theatre facilities (seating capacity) 750 750 N/A 4,000 4,750 533%

Car park bay 60 60 100 533 693 1,055%


HK & CHINA / GAMING


Bolstering mass market presence

The mass market segment consists of public-floor gaming tables and electronic gaming machines (EGMs). Public-floor gaming tables are the same as VIP tables but only open to foreign passport holders and locals holding foreign passports due to the conditions of NagaCorp’s casino license. EGMs are open to everyone, including local Cambodians. 40% of mass market customers are locals holding foreign passports, 20% are from Vietnam, and 40% are from other Asian nations. Minimum bets are smaller than for VIP and range from US$40 to US$300. However, since NagaCorp does not need to pay commissions to junkets in this segment, margins are much higher. There is also no credit risk.

Figure 7: NagaWorld’s mass hall overview

Table min bet (US$) Target customer

Public hall 40 Mass

Saigon Palace 100 Premium mass

Nagarock 200 Premium mass

Aristocrat Private Club 300 Premium mass


Growth in the mass market should be driven by higher visitation and rising spending by mass market players, supported by economic growth in Indochina. Cambodia remains a major tourist attraction and the country’s Ministry of Tourism forecasts international tourist arrivals will increase to 7.5m by 2020, which would result in a 9% CAGR over 2013-2020. Government plans to improve infrastructure to cope with the increase in visitor numbers include increasing handling capacity at the Phnom Penh and Siem Reap airports. NagaCorp will also play a role in improving travel services from China to Cambodia. The company will sell competitively priced F&B and hotel accommodation packages to China International Travel Service (CITS), the PRC’s largest travel agency. NagaCorp has also purchased two commercial aircraft, which it will lease to Bassaka Air, Cambodia’s newest airline. Bassaka will work with CITS to operate flights between Cambodia and second-tier Chinese cities, starting from October 2014. Furthermore, NagaCorp is providing Mandarin training to its staff and will revamp its F&B to include more Chinese food to cater for mainland tourists. All these measures should help attract more Chinese visitors to Phnom Penh.

Figure 8: Cambodia’s visitor growth has outpaced that of regional rivals

-5%

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012 2013

Australia Cambodia Korea Macau

Malaysia Philippines Singapore

Sources: Bloomberg, Cambodia Ministry of Tourism, and CER

HK & CHINA / GAMING


Figure 9: Quarterly mass market buy-ins and EGM bills-in trend

0

50

100

150

200

250

300

350

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14

(US$m) EGM Bil ls-in Public floor Buy-ins


Once visitor growth to Cambodia starts to kick in, NagaCorp is well placed to benefit since NagaWorld is the only scalable casino in the Indochina region. The only competing gaming facilities nearby are small casinos near the borders with Vietnam and Thailand. NagaCorp is therefore a key beneficiary of promising economic growth and rising individual wealth in Indochina, which should in turn result in greater demand for casino gaming and increasing average bet sizes. In comparison with developed markets, Southeast Asian nations are expected to grow faster in terms of population and GDP.

Figure 10: Tourist arrivals to Cambodia are rising rapidly

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2007 2008 2009 2010 2011 2012 2013

('000) International tourist arrivals Tourist arrivals from PRC

Sources: Cambodia Ministry of Tourism and CER

Figure 11: Cambodian tourist arrival growth from the PRC is outpacing overall growth

-10%

0%

10%

20%

30%

40%

50%

2007 2008 2009 2010 2011 2012 2013

International tourist arrivals Tourist arrivals from PRC


HK & CHINA / GAMING


Figure 12: PRC tourists are an increasing presence in Cambodia

0%

2%

4%

6%

8%

10%

12%

2007 2008 2009 2010 2011 2012 2013


Figure 13: Tourist arrivals by country in 2013

Vietnam20%

China11%

Korea10%

Lao PDR10%

Thailand5%

Japan5%

US4%

Australia3%

Russia3%

France3%

Others26%


Figure 14: Asian nations are growing faster in population …

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2010-2015 2015-2020 2020-2025 2025-2030

Developed regions

China Cambodia Indonesia Laos

Malaysia Myanmar Philippines Thailand Vietnam

Sources: United Nations and CER

Figure 15: … and GDP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2014 2015 2016

G10 Asia Indonesia Singapore

Philippines Malaysia Vietnam Thailand

Sources: Bloomberg and CER

Naga2/3 and entry into new gaming jurisdiction

NagaCorp has run its Cambodian casino monopoly successfully for 19 years and will cater for growing demand for gaming and entertainment facilities by building a second casino resort, Naga2. The opening of Naga2 in 2016 will double NagaCorp’s capacity and additional traffic should fuel earnings in the long term. Construction started at the end of 2012. The new facility will be similar in size to NagaWorld and feature 200-300 tables, 500 gaming machines, 50 VIP suites, more than 1,000 hotel rooms, and retail/MICE facilities. The company is also constructing a walkway, NagaCity Walk, to link NagaWorld and Naga2, and this will open in mid-2015. NagaCity Walk will house Phnom Penh’s first luxury mall and broaden NagaCorp’s retail footprint. It has already signed up leases for retail spaces at NagaCity Walk, with CITS-owned China Duty Free Group as the anchor tenant.

Naga2’s capex of US$369m is being financed by CEO Dr Chen. Once construction is completed, the project will be acquired by the listed company for US$369m through issuing a total of 1,566m new shares to Dr. Chen at HK$1.8776/share. The new shares will represent 41% of the enlarged share capital. This arrangement is aimed at eliminating cost overruns at the listed company level, which have already been observed in the construction so far. Another issue was that NagaCorp was not able to finance the Naga2 project at

HK & CHINA / GAMING


the time since the capex was equivalent to its entire equity base back then.

Figure 16: Locations of NagaWorld and its upcoming expansion projects

NagaWorld

Na

tion

al A

ssem

bly S

tree

t

Buddhist Institute

Sam

dech

Hun

Se

n

National Assembly

Ministry of Foreign Affairs

Australian Embassy

Naga2 Complex

Site area:16,675 sq m (4.1 acres)

GFA:113,307 sq m


GFA:110,105 sq m

Samdach Hun Sen Park

NagaCityWalk (Retail)


GFA:13,248 sq m


At the interim-results presentation, management revealed plans for a third complex, Naga3, which is still at the preliminary stage. Management targets Naga3 to become an iconic local tourist landmark, which it believes Phnom Penh currently lacks.

Looking further afield, NagaCorp plans to enter a new gaming jurisdiction, Russia. The company has agreed to invest US$350m in a 21.6-hectare gaming and resort development project near Russia’s border with northern China. The resort will be located in the Integrated Entertainment Zone (IEZ) close to the eastern Russian port city of Vladivostok in the Primorye Region. The IEZ is one of six areas that the government has designated as casino gaming zones. These are the only areas in the country where casino gaming is legal. The Russian government has four tenders and has already awarded two of them: one to NagaCorp and the other to Hong Kong-listed Summit Ascent (0102 HK, NR). NagaCorp’s planned casino hotel complex will consist of 200 gaming tables, 500 electronic gaming machines, 2,000 hotel suites, multi-purpose MICE facilities, and 10 F&B entertainment outlets. 1,000 of the hotel suites will be sold to third parties before opening, raising estimated total proceeds of US$100m, and then leased back to the company.

HK & CHINA / GAMING


Figure 17: NagaCorp’s proposed development for its Vladivostok casino projects

Key information Details

Proposed minimum investment US$350m.

Casino hotel gaming facilities 200 gaming tables and 500 EGMs.

Other facilities 2,000 hotel suites in total, of which 1,000 will be pre-sold under sale and leaseback arrangements. Multi-purpose MICE facility with seating capacity for more than 2,000 guests. 10 F&B and entertainment outlets.

Financial obligations

Site leasehold is for 15 years, ending 20 July 2025, subleased for 12 years from the Registered Lessee of the Land (CDPT), with an annual rental payment of US$79k. NagaCorp will acquire the freehold interest in the land on completion of the prevailing state land valuation. One-time payment of US$138k when the state registers the Sublease Agreement. NagaCorp will put up a bank guarantee of US$12m.

Tax regime Monthly gaming tax of RUB125,000 (US$3,600) per gaming table and RUB7,500 (US$215) per EGM. 20% corporate tax rate on non-gaming operations.


According to a study by consultancy Global Market Advisors, the IEZ is expected to generate gross gaming revenue of US$1.1bn in its first year of full operations, likely in 2018, and this will grow to an annual total of US$5.2bn within 10 years. Vladivostok has a highly favourable geographical location for attracting visitors from northern Asia, with Beijing, Korea and Japan less than three hours away by plane, while visa policies are also looser than those for Macau. Although other casinos are also in pipeline, such as in Korea, the rise of Macau’s gaming industry has demonstrated that additional high-quality supply has helped stimulate demand, with gross gaming revenues in the enclave growing rapidly in recent years along with increases in table capacity.

Figure 18: Catchment area for Vladivostok casino projects covers North Asia

Beijing

Tianjin

Jinan

Zhengzhou

Pyongyang

Seoul

Tokyo

Xi’an

Wuhan

Changsha

Shanghai

Hangzhou

Fuzhou

Kagoshima

Fukuoka

Hiroshima Osaka

Hamamatsu

NiigataSendai

Sapporo

Harbin

Changchun

Shenyang

Vladivostok

Hong Kong

Chongqing2,000 km from Vladivostok

1,000 km from Vladivostok

China

Taiwan

Japan

South Korea

North Korea

Busan

Hong Kong5 flights/week (4 hrs, 45 mins)

Busan1 flight/week (2 hrs)

Seoul22 flights/week (2 hrs, 25 mins)

Tokyo2 flights/week (2 hrs, 45 mins)

Beijing2 flights/week (2 hrs, 40 mins)

Mongolia

Russia

PrimorskyKrai

Pyongyang2 flights/week (1 hr, 40 mins)

PopulationsVladivostok/Artem 0.7mPrimorsky Krai 1.6mChinese population within 1,000 km 45mChinese population within 2 hr flight 132m


HK & CHINA / GAMING


Figure 19: Macau GGR has grown along with the number of casino tables…

1,0001,5002,0002,5003,0003,5004,0004,5005,0005,5006,000

1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14

(US$m)

1,000

3,000

5,000

7,000

9,000

11,000

13,000No. of tables (L) GGR (R)

Sources: DICJ and CER estimates

Figure 20: … with high correlation

R2 = 0.7216

1,000

3,000

5,000

7,000

9,000

11,000

13,000

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000

No. of tables

GGR (US$m)

Sources: DICJ and CER estimates

Figure 21: Mainland Chinese visitors to Macau by province/municipality, 2013

Others38% Guangdong

44%

Fujian4%

Zhejiang3%

Hunan4%

Beijing2%

Shanghai3%

Tianjin1%

Chongqing1%

Sources: DICJ and CER

In view of Russia’s recent geopolitical tensions, NagaCorp will invest in its IEZ project in stages, with US$50m earmarked for the first phase. The project will not begin operations until at least 2018. We assume the whole investment can generate 30% ROIC, the high end of new Cotai casino projects, and value the project at 8x EV/EBITDA, equivalent to Summit Ascent’s FY16E consensus EV/EBITDA. Since Summit Ascent targets to start operations much earlier, in 3Q14, we discount our NagaCorp IEZ valuation accordingly to reach a present value of HK$1.07 per share. Since the Russian project is still at the negotiation phase, we do not factor it into our target price, though we do expect it to become an additional long-term earnings driver and help NagaCorp diversify its growth profile.

HK & CHINA / GAMING


Financials

We forecast a revenue CAGR of 22% over FY14-16E, led by solid growth in the VIP market. We estimate VIP rollings to post a 25% CAGR, boosted by the new VIP initiatives attracting junket clients from Macau from 2015 as well as new VIP capacity. In the mass market, we expect growth in buy-ins to continue at a rapid pace, with a 17% CAGR supported by rising mass market spending and visitor numbers. Since we expect the pool to expand, we assume the VIP win rate can be sustained at 3.1%. This implies that the blended win/table/day will be US$3,500 in FY14E. We see plenty of room for improvement given the average of US$21k achieved by Macau casino operators.

Figure 22: NagaCorp & Macau win/table/day

0

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013

(US$) Macau NagaCorp

Sources: Company, DICJ and CER

We forecast slot machines to resume growth in 2H on rising Cambodia tourist visitor numbers and an increase in the number of slot machines. We forecast total EGM bills-in to record a 12% CAGR over FY14-16E.

Figure 23: NagaCorp revenue trend and FY14E revenue breakdown

0

100

200

300

400

500

600

700

FY13 FY14E FY15E FY16E

(US$m) Mass market VIP market Non-gaming

Sources: Company and CER estimates

Figure 24: FY14E revenue mix

Mass market:electronic gaming

machines28%

Mass market:public floor gaming

tables26%

Non-gaming5%

VIP market41%


HK & CHINA / GAMING


In view of the greater contribution from lower-margin VIP business, we expect gross margin to decline and stabilise at around 69% in FY17E. VIP gross margin was 39% in 1H14, down from 41% in 1H13, as the company had already started paying bigger commissions to lure higher-quality players. We believe the new revenue sharing incentive scheme will not have an adverse effect on profitability since commissions are now based on net win. Should the company suffer from adverse luck and record a lower-than-expected win rate, it would pay less commission, though it would also not benefit from any upside if the win rate is higher than expected. Mass-market gross margin improved slightly to 95% in 1H14. No commission expenses are incurred for this segment.

Figure 25: NagaCorp gross margin trend

65%66%

67%68%

69%70%

71%72%

73%74%

FY12 FY13 FY14E FY15E FY16E FY17E


Figure 26: Revenue sharing incentive scheme protects against downside if win rate is lower than expected

Win rate of 3.5% Standard win rate of 2.85% Win rate of 2.5%

Old scheme New scheme Old scheme New scheme Old scheme New scheme

1.7% commission

rate based on rollings

commission based on 70% of GGR

1.7% commission rate based on

rollings

commission based on 70% of GGR

1.7% commission rate based on

rollings

commission based

on 70% of GGR

US$100 bet 100 100 100 100 100 100

Win rate 3.50 3.50 2.85 2.85 2.50 2.50 Junket commission 1.70 2.45 1.70 2.00 1.70 1.75

Gaming tax at 1.5% of net win 0.05 0.05 0.04 0.04 0.04 0.04

Casino profit 1.75 1.00 1.11 0.81 0.76 0.71

Profitability (%) 49.93 28.50 38.85 28.50 30.50 28.50

Source: CER estimates

Since the company is in an expansion phase, costs as a percentage to revenue will continue at a high level for the coming three years. We estimate EBITDA margin to hover around 47-49% over FY14-16E.

Figure 27: NagaCorp EBITDA margin trend

45%

46%

47%

48%

49%

50%

FY12 FY13 FY14E FY15E FY16E FY17E


HK & CHINA / GAMING


We assume that NagaCorp can maintain its preferential gaming-tax treatment. Currently, it pays a fixed monthly tax of US$416k, which will increase 12.5% p.a. until 2018. This implies an effective tax rate of 3%-4% for FY14-16E. NagaCorp is currently discussing its post-2018 tax arrangements with the government.

We factor in the company issuing new shares to Dr Chen to acquire NagaCity Walk at the end of 2014 and Naga2 at the end of 2016. Even so, we forecast a two-year EPS CAGR of 10%. We do not factor in any contribution from the Russian casino project yet. Given the company’s substantial cash pile, we expect it will be able to maintain a 70% dividend payout ratio.

NagaCorp has been debt free since listing. As at the end of 1H14 it had US$184m of cash, down from US$252m at the end of 2013. The company bought some notes linked to a China bond USD hedge index in 1H14 and expects to dispose of these within 12 months. Its upcoming asset acquisitions will expand the asset base by 23% in FY14 and 41% in FY16.

The company has generated positive operating cash flows since 2007 because it provides only limited credit lines to junkets. Given its firm operating cash flows, we believe it will be able to fund capex of around US$30m p.a. internally, mainly for facility upgrades and maintenance.

HK & CHINA / GAMING


Valuation

Our target price is based on a sum-of-the-parts (SOTP) valuation of NagaCorp’s properties. We apply a 10x EV/EBITDA to NagaWorld’s FY15E EBITDA and also 10x to Naga2’s FY19E EBITDA, assuming it can fully ramp-up operations in FY19 after opening in 2017. We discount the enterprise value of Naga2 at 12.4% and have already factored the coming share dilution into our target price. We initiate with a Buy rating at a target price of HK$7.90.

Figure 28: NagaCorp SOTP valuations

Note (US$ m)

NagaWorld operation 10x FY15 EV/EBITDA 2,366

NPV of Naga2 10x FY19 EV/EBITDA, discounted at 12.4% 1,121

Net cash at end of FY15E 391

Total equity value 3,877

Fully diluted no. of shares (m) 3,848

Value per share (HK$) 7.90


Figure 29: DCF sensitivity analysis

Valuation discount to Macau operators

Discount rate (%) 40% 30% 20% 10% 0%

10.9 6.19 7.08 7.98 8.88 9.78

11.4 6.15 7.05 7.94 8.83 9.73

11.9 6.12 7.01 7.92 8.79 9.68

12.4 6.09 6.98 7.90 8.74 9.63

12.9 6.06 6.94 7.86 8.70 9.58

13.4 6.03 6.91 7.78 8.65 9.53

13.9 6.00 6.87 7.74 8.61 9.48

Source: CER estimates

Our target multiple is a 20% discount to the Macau gaming operators’ average of 12x given NagaCorp’s smaller scale and country risk associated with Cambodia.

NagaCorp has undergone a re-rating similar to Macau gaming operators since 2012. We believe this has been driven by growing investor confidence in the company’s strategy and consistent earnings growth delivery, as well as improving stock liquidity. Macau gaming operators have undergone a de-rating this year though amid a slowdown in revenue growth.

HK & CHINA / GAMING


Figure 30: NagaCorp’s 12M forward EV/EBITDA vs. Macau average

0

2

4

6

8

10

12

14

16

18

Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14

(X) NagaCorp Macau average

Sources: Bloomberg and CER estimates

Figure 31: NagaCorp’s historical valuation discount/premium to regional players

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%


Macau Malaysia Singapore Korea Philippines


HK & CHINA / GAMING


Figure 32: NagaCorp’s 12M forward PER and EV/EBITDA trends

PER

4

6

8

10

12

14


(X)

PER Average +1 s.d. -1 s.d.


EV/EBITDA

45

67

89

1011

12


(X)

EV/EBITDA Average +1 s.d. -1 s.d.


Figure 33: NagaCorp and Macau casino operators 3-year PER and EV/EBITDA range

PER

2

7

12

17

22

27

2

7

12

17

22

27

NagaCorp Melco Crown

SJM MGMChina

SandsChina

Galaxy WynnMacau

(X)

3-year 12M fwd PER range

Current forward PER

3-year average 12M fwd PER


EV/EBITDA

2

7

12

17

22

NagaCorp MelcoCrown

SJM MGMChina

SandsChina

Galaxy WynnMacau

(X)3-year 12M fwd EV/EBITDA rangeCurrent 12M fwd EV/EBITDA3-year average 12M fwd EV/EBITDA


Figure 34: NagaCorp and Macau 2013 and YTD share price performance

2013 Performances

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Nag

aCor

p

Mel

co C

row

n

SJM

MG

M C

hina

San

ds C

hina

Gal

axy

Wyn

n M

acau

HS

I

HS

CE

I


2014 performance YTD

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

Nag

aCor

p

Mel

co C

row

n

SJM

MG

M C

hina

San

ds C

hina

Gal

axy

Wyn

n M

acau

HS

I

HS

CE

I


HK & CHINA / GAMING


Figure 35: Peer comparison

Name Ticker CCY

Last Price (LC)

Mkt cap

(US$m)

3Mavg T/O(US$m)

Yearend

FY1 EPS growth

(%)

FY2 EPS growth

(%)FY1

PER (X) FY2

PER (X)

FY1 EV/EBITDA

(X)

FY2 EV/EBITDA

(X)

Div yield

(%)

NagaCorp 3918 HK HKD 6.48 1,908 5.3 Dec 13 6.8 3.5 12.4 12.0 8.1 6.7 5.2

Macau Gaming Operators

Sands China 1928 HK HKD 53.25 55,414 145.7 Dec 13 34.2 20.1 18.6 15.5 15.5 13.1 3.2

Galaxy 27 HK HKD 60.05 32,871 106.9 Dec 13 27.2 25.2 19.8 15.8 15.9 12.6 0.0

Wynn Macau 1128 HK HKD 31.20 20,914 29.9 Dec 13 4.9 7.3 20.1 18.7 16.1 14.9 3.2

Melco Crown MPEL US USD 29.17 16,204 138.9 Dec 13 32.1 20.1 19.1 15.9 12.8 10.2 1.1

SJM Holdings 880 HK HKD 19.92 14,536 22.9 Dec 13 6.2 9.0 13.5 12.4 9.3 8.5 3.6

MGM China 2282 HK HKD 26.35 12,920 22.3 Dec 13 18.4 9.8 15.9 14.5 13.3 12.1 2.0

Average 20.5 15.3 17.8 15.5 13.8 11.9 2.6

Asian Gaming Operators

Genting Singapore GENS SP SGD 1.26 12,394 13.1 Dec 13 10.3 7.8 22.1 20.3 10.8 10.2 0.8

Genting Bhd GENT MK MYR 9.90 11,665 5.6 Dec 13 10.0 9.9 17.7 16.1 7.2 6.8 0.0

Genting Malaysia GENM MK MYR 4.38 7,875 3.9 Dec 13 7.2 10.4 15.8 14.7 8.4 7.8 1.9

Kangwon Land 035250 KS KRW 34,850 7,322 15.1 Dec 13 N/A N/A N/A N/A 10.7 9.9 2.1

Alliance Global AGI PM PHP 26.00 6,113 7.2 Dec 13 13.9 9.8 14.8 13.0 9.5 8.2 1.5

Paradise 034230 KS KRW 36,350 3,247 22.0 Dec 13 13.7 25.4 24.4 21.1 19.3 14.8 0.3

Travellers RWM PM PHP 8.26 2,979 4.2 Dec 13 26.6 3.1 19.0 14.9 10.2 8.9 0.0

Bloomberry Resorts BLOOM PM PHP 11.20 2,715 1.9 Dec 13 59.1 22.2 27.1 17.0 14.8 10.1 0.0

Grand Korea Leisure 114090 KS KRW 41,750 2,536 10.9 Dec 13 15.3 13.3 19.1 16.5 10.0 6.9 2.8

Melco Crown Philippines MCP PM PHP 11.46 1,289 1.4 Dec 13 N/A 50.6 N/A 18.8 33.9 8.8 0.0

Belle Corp BEL PM PHP 5.02 1,214 1.2 Dec 13 155.9 27.7 31.2 12.2 25.7 10.7 0.4

Average 19.8* 18.0 21.3 16.5 14.6 9.4 1.4

Sources: Bloomberg and CER estimates, * excluding outlier

1H14 Results

1H14 revenue rose 26% YoY, led by a 61% YoY increase in the VIP market. Public-floor table buy-ins and VIP rollings increased 22% YoY and 20% YoY respectively. The positive results were attributed to higher business volume from mass market gaming tables and the successful revamp of the VIP market strategy through a new gaming revenue sharing scheme for junkets. VIP win rate improved significantly from 2.6% to 3.6%. As a result, total VIP gaming revenue increased 61% YoY to US$86m. EGM bills-in grew only 3% YoY as a result of a temporary drop in visitors due to refurbishment works on the gaming floor, the negative impact of strikes early this year in Cambodia, and social unrest in Thailand.

Gross profit margin dropped by 4 ppts to 69% in 1H14 as the sales mix shifted towards the lower-margin VIP market. Other operating expenses rose 88% YoY, faster than revenue growth due to an increased head count and the staff payroll rising 35% YoY. Management attributed the substantial increase in payroll expense to more staff incentives, aimed at improving customer service and reducing staff turnover. EPS rose 3% YoY to US¢2.96. An interim DPS of US¢2.07 was declared, representing a payout ratio of 70%.

HK & CHINA / GAMING


Figure 36: 1H14 results highlights

US$ ’000 1H13 1H14 YoY

Revenue 151,644 191,000 26%

COS (40,099) (58,302) 45%

Gross profit 111,545 132,698 19%

Other income 398 748 88%

Administrative expenses (20,394) (23,232) 14%

Other operating expenses (26,141) (39,655) 52%

PBT 65,408 70,559 8%

Income tax (2,556) (2,938) 15%

PAT 62,852 67,621 8%

EPS (US¢) 2.87 2.96 3%

DPS (US¢) 1.93 2.07 7%

KPIs

Public floor tables buy-ins 192,228 235,156 22%

Electronic gaming bills-in 557,867 574,905 3%

VIP rollings 2,013,915 2,422,040 20%

Gross gaming revenue 141,718 180,337 27%

VIP 53,342 86,024 61%

Mass market tables 44,346 53,117 20%

Mass market machines 44,030 41,196 (6%)

Non-gaming revenue 9,926 10,663 7%

Gross margin (%) 73.56 69.48 (4.08 ppts)

EBITDA margin (%) 51.18 45.33 (5.85 ppts)


Figure 37: 1H14 revenue breakdown

Non-gaming6%

Mass market:public floor gaming

tables28%

Mass market:electronic gaming

machines22%

VIP market44%


Figure 38: VIP market breakdown

1H13 1H14

Rollings (US$ m)

Rolling share (%)

Win rate (%)

Rollings (US$ m)

Rolling share (%)

Win rate (%)

Incentive program 659 33 2.4 1,671 69 3.4

Commission based 632 31 2.3 359 15 2.2

Direct VIP 723 36 3.2 392 16 5.4

Total 2,014 100 2.6 2,422 100 3.6


HK & CHINA / GAMING


Catalysts

Stronger than expected revenue and EBITDA growth.

Expansion into other countries to diversify business.

Rapid ramp up of VIP business serving Chinese patrons.

Russian casino market developing faster than expected.

Risks

Losing casino license. NagaCorp’s casinos operate under an exclusive gaming license granted by Cambodia government. Losing this license or its exclusive rights is unlikely, but would adversely affect operations.

Anti money laundering measures. Casinos handle substantial amounts of cash and are therefore vulnerable to being used for money laundering. Any non-compliance to Financial Action Task Force (FATF) recommendations may result in license suspension.

Increasing regional competition. More neighbouring countries are building casino resorts and the gaming market is becoming more competitive. The pie is expanding, but NagaCorp’s slice may shrink.

Political unrest or economic downturns in Asia. Visitor growth and tourist receipts are reliant on continued Asian economic growth. Political unrest in neighbouring countries may also affect Cambodia tourism growth.

Delays in opening Naga2 and Russian casino, which would otherwise become long-term growth drivers for the company.

Changes in Cambodian tax regime. NagaCorp will enjoy favourable gaming tax treatment until 2018. The company is negotiating with the government to extend this again, having already done so before in 2013. A significant jump in gaming tax could erode its competitive advantage and profitability.

Share placement overhang. Major shareholder Dr Chen’s stake will rise to 65% from 41.7% once NagaCorp acquires Naga2. He may need to sell down his stake to maintain NagaCorp’s free float and this could become an overhang for the stock. Dr Chen sold a 4.43% stake in November 2012 and a 10.28% stake in April 2012 to increase the stock’s free float.

HK & CHINA / GAMING


Company Background & History

NagaCorp operates NagaWorld, the only integrated casino-hotel in Cambodia’s capital city of Phnom Penh. The company holds a 70-year casino licence until 2065 and a 40-year casino monopoly within a 200-km radius of Phnom Penh until 2035. In 2013, mass market, VIP market and non-gaming contributed about 55%, 39% and 6% of total revenue respectively.

NagaCorp was found by Tan Sri Dr Chen. He was granted the casino license in 1995 and started casino operations on a barge anchored on the Bassac River the same year. The company was awarded its current land site in 2000 and relocated the casino operations from the barge to the current site in 2003, where it now operates the NagaWorld complex. NagaCorp listed in Hong Kong in October 2006.

Figure 39: Shareholding structure

5.54% 41.71%

NagaCorp

52.75%

Tan Sri Dr Chen Lip KeongAmeriprise Financial Inc Public Shareholders

5.54% 41.71%

NagaCorp

52.75%

Tan Sri Dr Chen Lip KeongAmeriprise Financial Inc Public Shareholders

Sources: HKEx and CER

Figure 40: Porter’s five forces

Threat of new entrants

Weak. NagaCorp has a well-established exclusive gaming license in Cambodia, dating

back to 1999. The government has strongly enforced shutdowns of

unlicensed casinos and slot machine operators.

Threat of substitutes

Weak. Casinos are the only legal form of gambling in

Cambodia and have no close substitutes. The only

alternative would be other types of entertainment.

Bargaining powerof customers

Weak. NagaWorld is the only scalable casino in Phnom

Penh and enjoys monopoly operations.

Intensity of Rivalry

Weak to Medium. The nearest competitors are in neighbouring countries or small casinos near Cambodia’s borders. They are

unlikely to cannibalise NagaCorp’s business since the gaming pie is growing steadily. The Macau experience bodes

well for growth prospects.

Bargaining powerof suppliers

Weak to medium. The casino license is granted by Cambodia’s

government. Other major suppliers include gaming machine providers, VIP junkets and labour. There are

many gaming machine providers and junket operators globally. On salaries,

NagaCorp’s compensation is well above the national

minimum wage.

Source: CER

HK & CHINA / GAMING


Figure 41: SWOT analysis

S WStrengths Weaknesses

O TOpportunities Threats

Monopoly casino operation in Cambodia with no table restriction and favourable tax structure.

Strong balance sheet; expected to remain net cash by the end of FY14.

Close relations with current government.

Favourable location. Cambodia is also home to Angkor Wat, a unique sightseeing destination in Asia. And Phnom Penh is within three hours flights from SE Asia.

Low working capital and capex requirements. Only limited credit is provided to junkets. This allows for strong free cash flow generation to support higher dividend payouts.

Small-scale operator and may not be able to attract big high-rollers.

Relies on junkets for VIP operation. If the company’s terms become less attractive it may lose business from junkets.

Finances depend on luck, which cannot be controlled.

Asian gaming industry is expanding along with strong economic growth in the region.

Increasing visitor numbers to Cambodia. The government is improving infrastructure and promoting the tourism industry.

Accessing the Chinese VIP market by working with Macau junket operators.

Russian expansion. Entering this new gaming jurisdiction can help diversify the business.

Keener competition as more governments around the region legalize casino gambling to expand revenue source and attract tourists.

Cambodia is regarded as an emerging economy and business operations may be subject to higher political risk.

Source: CER

HK & CHINA / GAMING


Management Profiles

Tan Sri Dr Chen Lip Keong, Founder, Controlling Shareholder and Chief Executive Officer. Dr Chen has many years of entrepreneurial, business and managerial experience. In Malaysia he is also the controlling shareholder of Karambunai Corp Bhd (KCB), FACB Industries Incorporated Berhad (FACBI) and Petaling Tin Berhad, which are all listed on the Bursa Malaysia Securities Berhad.

Timothy Patrick McNally, Chairman. Mr McNally joined in February 2005 as chairman of the board. From April 1999 to October 2005 he was Executive Director of Security and Corporate Legal Services for the Hong Kong Jockey Club and was also a member of the Executive Board of Management responsible for corporate governance issues. Prior to this, he was a Special Agent of the Federal Bureau of Investigation (FBI) for almost 25 years. His career focused on the investigation and prosecution of serious crimes including organized crime, drug trafficking, public corruption and fraud matters.

Philip Lee Wai Tuck, Executive Director. Mr Lee has previously worked in or held directorships in various companies listed on the Bursa Malaysia. He has also held senior management positions in financial and management functions with wide-ranging experience in accounting, finance, treasury and corporate finance. He oversees the financial, treasury and business operations of the group.

Chen Yepern, Executive Director. Mr Chen was appointed as an executive director in February 2011, and also a member of the Remuneration Committee, Nomination Committee and AML Oversight Committee of the company. He graduated with a Bachelor of Science degree in Finance from The California State University Northridge in 2009 and subsequently worked at Caesars Palace in 2010, and is the son of Tan Sri Dr Chen Lip Keong.

Mark Anthony Brown, Chief Operating Officer of NagaWorld. Mr Brown supports the Chief Executive Officer in managing the operations, marketing and business development of NagaWorld and, together with other consultants, driving the initial stages of the development of the casino project in Vladivostok, the Primorsky Region, Russia. Prior to joining the group, he served as Senior Vice President of Strategic Development, Wynn.

HK & CHINA / GAMING


Company Description NagaCorp operates NagaWorld, the only integrated casino-hotel in Cambodia’s capital city of Phnom Penh. The company holds a 70-year casino licence until 2065 and a 40-year casino monopoly within a 200-km radius of Phnom Penh until 2035. In 2013, mass market, VIP market and non-gaming contributed about 55%, 39% and 6% of total revenue respectively.

Income Statement (Consolidated) FY-end 31 Dec (US$ m) 2012 2013 2014E 2015E 2016ESales 278.8 344.9 410.3 503.3 596.7Cost of sales (75.6) (96.4) (120.8) (149.9) (185.3)Gross profit 203.2 248.6 289.5 353.4 411.4Other income 1.4 1.8 2.5 2.7 3.3Operating expenses (87.0) (104.9) (133.4) (163.6) (188.0)Operating profit 117.6 145.4 158.7 192.6 226.8Finance cost, net - - - - -Pre-tax profit 117.6 145.4 158.7 192.6 226.8Tax (4.5) (5.1) (5.7) (6.6) (7.5)Minorities - - - - -Net profit 113.1 140.3 153.0 186.0 219.2EBITDA 137.8 171.8 196.4 236.6 294.2EBIT 117.6 145.4 158.7 192.6 226.8EPS (US cents) 5.43 6.28 6.70 6.94 8.18DPS (US cents) 3.84 4.31 4.69 4.86 5.72


Cash Flow (Consolidated) FY-end 31 Dec (US$ m) 2012 2013 2014E 2015E 2016EOperating cash flow 143.9 179.9 196.6 239.5 299.7

Net profit 113.1 140.3 153.0 186.0 219.2Depreciation & amortization 20.2 26.4 37.7 44.0 67.5Change in working capital 9.8 12.4 5.9 9.5 13.0Others 0.8 0.8 0.0 - 0.0

Investment cash flow (71.7) (58.8) (30.0) (30.0) (30.0)Net capex (72.2) (59.4) (30.0) (30.0) (30.0)Disposals - - - - -Change in LT assets - - - - -

Free cash flow 71.7 120.5 166.6 209.5 269.7Financing cash flow (63.7) 57.8 (109.7) (128.0) (159.2)

Change in share capital - 156.1 - - -Net change in debt - - - - -Dividend paid (63.7) (97.2) (109.7) (128.0) (159.2)

Net cash flow 8.5 178.9 56.9 81.5 110.5


Key Assumptions FY-end 31 Dec 2012 2013 2014E 2015E 2016E

VIP rollings YoY % 17 21 18 25 25

Public floor Buy-ins YoY % 34 15 20 20 15


Balance Sheet (Consolidated) FY-end 31 Dec (US$ m) 2012 2013 2014E 2015E 2016ETotal assets 428.3 640.1 786.0 855.7 1,205.0Current assets 95.3 270.9 330.5 414.2 525.9

Cash & ST investments 73.2 252.1 309.0 390.6 501.1Marketable securities - - - - -Account & notes receivable 20.9 17.8 20.5 22.6 23.9Inventories 1.1 1.0 1.0 1.0 1.0Others 0.0 0.0 0.0 0.0 0.0

Non-current assets 333.0 369.2 455.5 441.5 679.0Net fixed assets 318.6 347.6 433.8 438.0 675.5Others 14.4 21.6 21.6 3.5 3.5

Total liabilities 26.4 40.1 48.8 60.4 74.6Current liabilities 26.4 40.1 48.8 60.4 74.6

Account payable 26.0 39.7 48.3 60.0 74.1ST borrowings - - - - -Others 0.4 0.4 0.4 0.4 0.4

Non-current liabilities 0.0 0.0 0.0 0.0 0.0Long-term debts - - - - -Others - - - - -

Total equity 401.9 600.0 737.2 795.3 1,130.4Shareholders' equity 401.9 600.0 737.2 795.3 1,130.4Minority shareholders - - - - -

Total liabilities + total equities 428.3 640.1 786.0 855.7 1,205.0Net cash / (debt) 73.2 252.1 309.0 390.6 501.1Working capital 68.9 230.8 281.8 353.8 451.4Total capital employed 401.9 600.0 737.2 795.3 1,130.4Shareholders' equity + Minorities 401.9 600.0 737.2 795.3 1,130.4Net gearing (%) NC NC NC NC NCSources: Company, CER estimates

Financial Summary FY-end 31 Dec 2012 2013 2014E 2015E 2016EGrowth (%)

Revenue 24.6 23.7 18.9 22.7 18.6EBITDA 23.3 24.7 14.3 20.4 24.4EBIT 22.5 23.6 9.1 21.4 17.7Net profit 22.9 24.0 9.1 21.6 17.9EPS 22.9 15.7 6.8 3.5 17.9

Margins (%) Gross 72.9 72.1 70.6 70.2 68.9EBITDA 49.4 49.8 47.9 47.0 49.3EBIT 42.2 42.2 38.7 38.3 38.0Net 40.6 40.7 37.3 37.0 36.7

Others (%) Effective tax rate 3.8 3.5 3.6 3.4 3.3Payout ratio 70.7 68.6 70.0 70.0 70.0RoCE 31.2 29.0 23.7 25.1 23.5Average RoE 30.0 28.0 22.9 24.3 22.8Average RoA 28.3 26.3 21.5 22.7 21.3Interest cover (x) N/A N/A N/A N/A N/A


China Everbright Research Limited

Everbright Research Limited Rating System

Buy Expected to outperform the benchmark index by >15% over the next six months Accumulate Expected to outperform the benchmark index by 5 - 15% over the next six months Hold Expected to outperform or underperform the benchmark index by <5% over the next six months Reduce Expected to underperform the benchmark index by 5 - 15% over the next six months Sell Expected to underperform the benchmark index by >15% over the next six months Analyst Certification The research analyst(s) primarily responsible for the preparation of this report hereby certify that – (1) All of the views expressed in this report accurately reflect his or her or their personal views about the subject

company or companies and its/theirs securities; (2) No part of his or her or their compensation was/were, is/are or will be directly or indirectly, related to the specific

recommendations or views expressed in this report or any specific investment banking function; (3) He/she/they are not directly supervised by, and do not directly report to, investment banking functions; (4) He/she/they has/have not breach the quiet period restriction of dealing in the securities covered in this report; (5) He/she/they is/are not an officer and do(es) not hold any directorship in the company or companies this report

covered. Disclosure China Everbright Securities International Limited, a substantial shareholder of China Everbright Research Limited, does not have financial interests (including stock holding) that equal 1% or more of the market capitalization of the company under review at the date this report is published; does not have investment banking relationship with the company under review within the past 12 months; and does not have market-making activities in the stock. None of our staff is an officer of the company. Disclaimer This report has been prepared by China Everbright Research Ltd. China Everbright Research Limited does not guarantee, either expressed or implied, the completeness, reliability and accuracy of the materials contained in the report. This report has been prepared for general reference and no part of this report is to be constructed as an offer, invitation, advertisement or inducement whatsoever, or form to buy or sell any securities or financial instruments whether referred to herein or otherwise. Opinions in this report are subject to change by the original writer without notice. China Everbright Research Limited does not accept any liability whatsoever, directly, indirectly, consequential or incidental that may arise from the use of or reliance on the contents of this report. China Everbright Research Limited and its affiliates and their respective associates, directors, employees or officers may from time to time have long or short positions in securities, warrants, futures, options, derivatives or any other interests and/or underwriting commitments in the securities or financial instruments referred to in this report. Reports by China Everbright Research Limited do not have regard to the specific investment objectives, financial situation, risk tolerance or the particular needs of any investor. Before entering into any investment contract, individual should exercise judgment or seek for professional advice when necessary. The information contained herein is believed to be reliable. Its completeness and accuracy are, however, not guaranteed. All copyrights are reserved by China Everbright Research Limited. This report or any part of its contents must not be reproduced in whole or in part without the prior written approval of China Everbright Research Limited. China Everbright Research Limited is licensed by the Securities and Futures Commission (SFC) and is governed under the rules and regulations of the SFC and the Securities and Futures Ordinances and its subsidiary legislation. Address: 17/F., Far East Finance Centre, No. 16 Harcourt Road, Hong Kong. Contact No.: (852) 2860-1101

company report nagacorp (3918 hk)

Documents