20160610-招商证券_香港_-凯升控股-00102.HK-Siberian_tiger_in_lucrative_Northeast_China_market_30页_1mb

Investment Thesis Summary

Core Content

The investment thesis for Summit Ascent focuses on the development of the Primorye Integrated Entertainment Zone (IEZ) in the Russian Far East, which is positioned as a new market with minimal competition and significant growth potential. This area is strategically located, covering 226 million Chinese within a 2.5-hour flight radius, making it an attractive alternative for Northeast Chinese gamblers who are underserved by Macau casinos. The IEZ offers a favorable tax environment, relaxed visa policies, and a growing number of peers entering the market, which together create a compelling investment opportunity.

Main Points

• Proximity to Northeast China: The IEZ is close to major Chinese cities such as Harbin and Shanghai, and is the only gaming area in the Russian Far East.
• Favorable Tax Policy: Gaming tax is low and unlikely to increase in the foreseeable future. Casinos pay a fixed monthly tax per gaming table and slot machine, with an estimated 2% of FY16E GGR. The tax environment is more attractive than other regions.
• Visa Policy Relaxation: Since January 2016, foreigners can enter the free port zone in Vladivostok with a visa on arrival for up to 8 days, with implementation expected in July 2016.
• Growing Accessibility: New flight routes from Chinese cities like Shanghai, Harbin, and Tianjin are being added, and expressways to the IEZ are expected to be operational by summer 2016.
• Cluster Effect: Multiple operators are entering the IEZ market, including NagaCorp, Royal Time, and Diamond Fortune, which will help to grow the market and increase synergies.
• Differentiated Non-Gaming Amenities: The IEZ offers a variety of outdoor activities and non-gaming facilities such as a golf course, yacht club, amusement park, and more, enhancing its appeal beyond just gaming.
• Improved Margins: With the ramp-up of operations, EBITDA margins are projected to rise significantly. Summit Ascent's EBITDA margin is expected to reach 46% in FY16E and 54% in FY17E, with a slight curve down to 50% in FY18E.
• Valuation Discount: Summit Ascent is currently trading at a 30% discount to Macau peers, based on EV/EBITDA multiples. This discount is attributed to slower-than-expected ramp-up, limited market track record, and investor concerns over Russian currency.
• Investment Recommendation: The report initiates coverage with a BUY rating and a target price of HK$2.70, based on a 13x EV/EBITDA multiple for FY17E, at a 13% discount to the historical average of the Macau gaming sector.

Key Information

• Tigre de Cristal: The first casino in the IEZ, opened in November 2015, with 68 gaming tables, 321 slot machines, and 121 hotel rooms. Phase 2 is expected to open in 2018.
• Company Background: Summit Ascent is a holding company primarily engaged in gaming and hotel operations through its 60% stake in Oriental Regent.
• Management: Led by Mr. Ho, Lawrence Yau Lung, with a strong background in the gaming and entertainment industry, including roles at Melco International Development Limited.
• Valuation: The current valuation of Summit Ascent is 8.5x FY17E EV/EBITDA, a 30% discount to Macau peers.
• Risks: Potential reversal of regulatory environment in Russia, market cannibalization from increasing number of casinos, and increased competition from the region.

Investment Highlights

• Improving Accessibility: New flight routes and improved transportation infrastructure are expected to enhance visitor flow.
• Peers Joining the Market: Several operators are set to open properties in FY18E and FY19E, contributing to the cluster effect.
• Fixed Room Junkets: Expected to begin operations in mid-2016, bringing higher volume and profitability to the casino.
• Differentiated Non-Gaming Amenities: The IEZ is developing into a comprehensive entertainment and leisure hub, not just a gaming destination.
• Margin Improvement: With the ramp-up of operations, EBITDA margins are expected to improve significantly, driven by lower operating costs and higher gaming yields.

Conclusion

Summit Ascent is well-positioned to benefit from the growth of the IEZ, which offers a unique opportunity due to its proximity to a large Chinese population, favorable tax policies, and improved accessibility. The company's valuation is undervalued compared to Macau peers, and the entry of new operators into the market is expected to drive growth and enhance the overall appeal of the IEZ. The investment thesis highlights the potential for significant margin expansion and increased profitability through the ramp-up process and the expansion of non-gaming amenities.