Equity Research February 5, 2018

NagaCorp Beneficiary from increased Chinese investment in

Investment Focus Maintain BUY

Action Ticker 03918.HK We reiterate our BUY rating on NagaCorp (3918.HK) and raise our CICC investment rating BUY target price by 35.6% to HK$8, implying 21.2% upside room from the Last close HK$6.60 current price. CICC target HK$8.00

52wk price range HK$6.69~3.18 Reasoning Market cap (bn) HK$29

VIP business could benefit from Chinese investment in Cambodia. Daily value (mn) HK$23.86 Shares outstanding (mn) 4,341 China’s Premier Li Keqiang visited Cambodia on January 10–11 and Free float (%) 100 signed 19 agreements regarding future economic partnerships. We Daily volume (mn sh) 3.77 believe the increase in Mainland investment in Cambodia could be Business sector Gaming beneficial to Naga’s VIP business as 1) Chinese business owners will visit more frequently; and 2) more Chinese expatriates 03918.HK HSI will relocate to Cambodia. 160

From our channel checks, junkets have noticed an increase of Chinese 140 patrons making trips to Phnom Penh. We believe one of Macau’s 120 largest junkets could begin fixed junket room operations at Naga 2 100

as early as late 1Q18. (%) Value Relative 80

NagaCorp will report FY2017 results on February 6. We expect EBITDA 60 Feb-2017 May-2017 Aug-2017 Nov-2017 Jan-2018 and net profit to be US$336mn and US$252mn, respectively 12% and 15% ahead of Bloomberg consensus. (US$ mn) 2016A 2017E 2018E 2019E

Earnings forecast and valuation Revenue 532 815 1,324 1,468 We lift our FY18e revenue, EBTIDA and net profit projections by 25%, (+/-) 5.5% 53.3% 62.4% 10.9% 22% and 34% on 1) lower than expected cannibalization of Net profit 184 258 379 436 (+/-) 6.7% 39.8% 47.2% 14.9% NagaWorld’s operations post Naga 2’s opening; 2) revised gaming tax assumption (8% to 5%); and 3) stronger ramp up of Naga 2’s EPS 0.07 0.06 0.09 0.10 operations. BPS 0.48 0.32 0.37 0.42 DPS 0.04 0.04 0.05 0.06

Our target price of HK$8.00 for NagaCorp is based on SOTP valuation CPS 0.08 0.07 0.09 0.11 of: 1) 8x 2018e EV/EBITDA on NagaWorld; 2) 9x 2019e EV/EBITDA on P/E 12.1 14.3 9.7 8.4 Naga 2 as it fully ramps up, discounted by a WACC of 10%, and 3) P/B 1.8 2.6 2.3 2.0 adding the net cash balance at end-2018e. EV/EBITDA 7.9 10.1 6.5 5.4

Dividend yield 2.7% 2.4% 3.5% 4.0% Risks ROAA 18.3% 18.8% 23.9% 23.9%

Uncertainty in timing and magnitude of gaming tax; slower than ROAE 19.0% 19.4% 25.1% 25.2% expected ramp up of Naga 2 operations.

Source: Wind, Bloomberg, company data, CICC Research

Shengyong GOH Kai QIAN

Analyst Analyst [email protected] [email protected] SAC Reg. No.: S0080117120050 SAC Reg. No.: S0080513050004 SFC CE Ref: BEF674 SFC CE Ref: AZA933

Please read carefully the important disclosures at the end of this report CICC Research: February 5, 2018

Financial summary

Financial statement (USD mn) 2016A 2017E 2018E 2019E Financial ratios 2016A 2017E 2018E 2019E Income statement Growth ability Revenue 532 815 1,324 1,468 Revenue 5.5% 53.3% 62.4% 10.9% COGS -165 -331 -613 -675 Operating profit 10.4% 36.5% 63.5% 14.3% Selling expenses 0 0 0 0 EBITDA 12.1% 33.6% 52.1% 13.0% Administrative expenses -53 -67 -88 -95 Net profit 6.7% 39.8% 47.2% 14.9% Other ops income (expense) -112 -141 -170 -181 Profitability Operating profit 202 276 452 517 Gross margin 69.0% 59.4% 53.7% 54.0% Finance costs 0 0 0 0 Operating margin 38.1% 33.9% 34.2% 35.2% Other income (expense) 6 6 6 6 EBITDA margin 48.2% 42.0% 39.3% 40.0% Profit before income tax 208 282 458 522 Net margin 34.6% 31.6% 28.6% 29.7% Income tax -24 -25 -79 -87 Liquidity Minority interest 0 0 0 0 Current ratio 7.18 5.61 5.33 6.86 Net profit 184 258 379 436 Quick ratio 7.18 5.61 5.33 6.86 EBITDA 256 342 520 588 Cash ratio 5.32 3.62 3.35 4.88 Recurrent net income 184 258 379 436 Liabilities / assets 3.1% 3.9% 5.4% 5.3% Balance sheet Net debt / equity net cash net cash net cash net cash Cash and bank balances 211 205 308 499 Return Trade and bill receivables 73 111 181 200 RoA 18.3% 18.8% 23.9% 23.9% Inventories 0 0 0 0 RoE 19.0% 19.4% 25.1% 25.2% Other current assets 1 1 1 1 Per-share data Total current assets 285 318 490 701 EPS (USD) 0.07 0.06 0.09 0.10 Fixed assets and CIP 904 1,039 1,131 1,144 BPS (USD) 0.48 0.32 0.37 0.42 Intangible assets and others 102 98 93 89 DPS (USD) 0.04 0.04 0.05 0.06 Total non-current assets 1,006 1,137 1,224 1,232 Cash flow per share (USD) 0.08 0.07 0.09 0.11 Total assets 1,291 1,455 1,715 1,933 Valuation Short-term borrowings 0 0 0 0 P/E 12.1 14.3 9.7 8.4 Trade and bill payables 37 57 92 102 P/B 1.8 2.6 2.3 2.0 Other current liabilities 3 0 0 0 EV/EBITDA 7.9 10.1 6.5 5.4 Total current liabilities 40 57 92 102 Dividend yield 2.7% 2.4% 3.5% 4.0% Long-term borrowings 0 0 0 0 Total non-current liabilities 0 0 0 0 Total liabilities 40 57 92 102 Share capital 31 31 31 31 Retained profit 1,220 1,367 1,592 1,800 Equity 1,251 1,398 1,623 1,831 Total liabilities & equity 1,291 1,455 1,715 1,933 Cash flow statement Pretax profit 208 282 458 522 Depreciation & amortization 48 60 63 66 Change in working capital -31 -19 -34 -10 Others -24 -27 -79 -87 Cash flow from operations 202 296 408 491 Capital expenditure -137 -191 -150 -73 Others 1 0 0 0 Cash flow from investing -136 -191 -150 -73 Equity financing 120 0 0 0 Bank borrowings 0 0 0 0 Others -118 -110 -155 -227 Cash flow from financing 2 -110 -155 -227 Foreign exchange gain (loss) 0 0 0 0 Net changes in cash 68 -6 103 190 Source: Company data, CICC Research

Company description

NagaCorp Limited is a leisure and tourism company with casino operations, with the company founder Dr. Chen as its substantial shareholder. It operates the largest integrated gaming and entertainment hotel complex in Cambodia – NagaWorld, which is the only licensed casino in the capital city of Phnom Penh. The license is valid for 70 years from 2 Jan 1995 and is exclusive within a designated area until 2035. NagaCorp had reported EBITDA margin of 48% in 2016 and held 241 gaming tables and 1,648 gaming machines as at the end of 2016.Located right next to NagaWorld, the company opened NagaCity Walk in August 2016, which offers duty-free shopping operated by China Duty Free Group ("CDFG"). Naga2 is undergoing fit-out and is expected to be operational in 2017.

Please read carefully the important disclosures at the end of this report 2 CICC Research: February 5, 2018

Naga to benefit from increased Chinese investment in Cambodia

Naga 2017e results to top Bloomberg expectations (FY2017 results on February 6)

NagaCorp is expected to report FY2017 results on February 6. We project gross gaming revenue (GGR) for 2H17e and 2017e will show 72% and 42% YoY growth, driven by 1) robust growth within the VIP segment and 2) the opening of Naga 2. We project NagaCorp’s EBITDA and net profit to grow 50% & 72% YoY to US$155mn & US$101mn in 2H17e.

Figure 1: CICCe vs. Consensus NagaCorp: CICC vs. consensus ------2017E------2018E------2019E------CICC est. Consensus Delta CICC est. Consensus Delta CICC est. Consensus Delta (US$mn) (US$mn) (%) (US$mn) (US$mn) (%) (US$mn) (US$mn) (%) Gross revenue 804 749 7 1,256 1,014 24 1,391 1,137 22 EBITDA 336 300 12 476 400 19 536 461 16 Net profits 252 219 15 323 276 17 369 315 17 EPS (US$) 0.058 0.052 12 0.074 0.061 22 0.085 0.070 21

EBITDA margin on gross revenue (%) 41.8 40.0 37.9 39.4 38.5 40.5 Source: Bloomberg, CICC Research

VIP business could continue thriving in 2018 with increased Chinese investment in Cambodia

In October 2016, Chinese President Xi Jinping visited Cambodia and met with Cambodian Prime Minister Hun Sen. Both countries signed a number of investment agreements covering areas such as agriculture, oceanic industries, energy, telecommunication and infrastructure. Xi pledged to urge Chinese investment in building high-speed train lines and an airport in Siem Reap province, which could be a basis for further investment from China.

We believe that an increase in Chinese investment in Cambodia could have fueled the growth in VIP business for Naga in 2017e (VIP GGR could grow 80% YoY in 2017e) as 1) business owners visited Phnom Penh more frequently and 2) more Chinese relocated to Cambodia.

In January 2018, Chinese Premier Li Keqiang visited Phnom Penh and signed 19 agreements on future economic partnerships, which will support further VIP GGR growth in 2018e.

Mass segment supported by direct flights from Chinese cities

Bassaka Air began direct flights from from November 17. Following the success of new flight routes from in 1H17 (nearly full loads on all flights), management increased the frequency of flights from all cities from twice a week to 3–5 times a week. We believe strategic partnerships with Bassaka Air and China International Travel Service (CITS) will continue to underpin Naga’s continued visitation growth and mass gaming revenue.

Newly opened Naga 2 to ramp up further in 2018

On November 3, NagaCorp soft-launched Naga 2, a new property connected with NagaWorld through shopping arcade Naga CityWalk. Naga 2 opened with about 100 gaming tables (50 each in both VIP and Mass areas), 600 electronic gaming machines and 600 hotel rooms. Naga 2 is expected to ramp up its operations in 2018 with an additional 200 gaming tables, 2,000 electronic gaming machines, 300 hotel rooms and a 2,200 seat theatre expected to open.

Please read carefully the important disclosures at the end of this report 3 CICC Research: February 5, 2018

Valuation

Maintain BUY and lift target price to HK$8.00

We raise our FY17e/18e revenue by 0%/25% and lift our EBITDA estimates 3%/22%, respectively; based on our SOTP valuation. We value NagaWorld by applying 7x 2018e EBITDA, which indicates a 50% discount to its Macau peers given the differences in market size, environment and country risks between Macau and Cambodia. We value Naga 2 by applying 8x 2019e EBITDA as it fully ramps up, discounted by a WACC of 10%, in order to reflect its high growth potential. The Vladivostok project is not included in our SOTP model as we do not expect it to generate any meaningful revenue contribution before 2020. In our view, future growth opportunities lie in: 1) Naga 2 and the Vladivostok project, 2) enhanced partnership with China, and 3) growing Chinese tourism to Cambodia.

Figure 2: Changes to our estimates NagaCorp: Changes to estimates ------2017E------2018E------2019E------New Old Delta New Old Delta New Consensus Delta (US$mn) (US$mn) (%) (US$mn) (US$mn) (US$mn) (US$mn) Gross revenue 804 806 (0) 1,256 1,052 19 1,391 1,137 22 EBITDA 336 325 3 476 414 15 536 461 16 Net profits 252 234 8 323 259 25 369 315 17

EBITDA margin on gross revenue (%) 41.8 40.3 37.9 39.4 38.5 40.5 Source: Bloomberg, CICC Research

Figure 3: SOTP-based valuation (HK$ mn) Target Project Assumptions EBITDA Multiple EV NPV Per Share % of NAV (HK$mn) (x) (HK$mn) (HK$mn) (HK$) (%)

NagaWorld 2018E EBITDA 1,681 8 x 13,616 13,616 3.1 39%

Naga2 2019E EBITDA 2,118 9 x 19,064 19,064 4.4 55%

Net Cash/(Debt) at end 2018E 1,979 0.46 6% EQUITY VALUE 34,659 8.00 100%

Fully Diluted Share Count 4,341

EQUITY VALUE PER SHARE 8.00 Source: CICC Research

Please read carefully the important disclosures at the end of this report 4 CICC Research: February 5, 2018

Figure 4: Rolling EV/EBITDA – Macau vs. Naga Figure 5: Naga’s forward EV/EBITDA

(HK$) NagaCorp - Share price Rolling EV/EBITDA (RHS) (x) Naga EV/EBITDA Industry EV/EBITDA (RHS) (x) 10 14 +1 s.d. 19x 25 Average 16x 12 -1 s.d. 13x 8 20 10

15 8 6 6 10 4 4 5 2

0 2 0 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Source: Bloomberg, CICC Research Source: Bloomberg, CICC Research

Figure 6: SOTP-based valuation (HK$ mn, prices as of February 2) Market Price cap Company Ticker in lcy (US$mn) EV/EBITDA (x) EBITDA growth P/E (x) Div. yield FCF yield Macau 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E Sands China 1928 HK 44.6 46,052 20 16 15 25% 24% 10% 29 20 18 5% 5% 5% 4% 6% 6% Galaxy 27 HK 68.4 37,683 20 15 14 37% 24% 5% 29 22 22 1% 2% 3% 4% 6% 5% Melco Resorts MLCO US 28.8 14,184 15 11 10 28% 29% 8% 32 20 17 1% 5% 5% 6% 10% 10% Wynn Macau 1128 HK 26.9 17,874 20 16 14 112% 22% 8% 32 24 21 3% 4% 5% 8% 8% 8% MGM China 2282 HK 23.8 11,565 29 17 14 -2% 68% 16% 42 29 22 1% 2% 5% -7% 6% 8% SJM Holdings 880 HK 7.7 5,600 12 13 8 -8% 17% 40% 25 24 21 2% 2% 3% -13% -18% 17% Sector 132,959 19 15 13 31% 27% 10% 32 23 20 NagaCorp 3918 HK 6.6 3,664 10 7 6 31% 42% 13% 15 11 10 4% 5% 6% 3% 6% 10% Source: Bloomberg, CICC Research

Figure 7: NagaWorld (large buildings at center left) is adjacent to Cambodia’s National Assembly (right) and Buddhist Institute (foreground left) Figure 8: NagaWorld

Source: CICC Research Source: NagaCorp company website

Please read carefully the important disclosures at the end of this report 5 CICC Research: February 5, 2018

Figure 9: Naga 2 hotel room view Figure 10: Naga 2 hotel room view (suite)

Source: CICC Research Source: CICC Research

Figure 11: Naga 2 lobby Figure 12: Gaming tables

Source: CICC Research Source: CICC Research

Please read carefully the important disclosures at the end of this report 6 CICC Research

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