20171106-招商证券_香港_-金界控股-03918.HK-Naga2__product_upgrade_to_improve_penetration_8页_1mb

NagaCorp (3918 HK) Summary

Core Content

NagaCorp, a Macau gaming and hospitality company, has recently launched Naga2, a major expansion of its NagaWorld resort. The soft opening of Naga2 occurred on November 3, 2017, and it is expected to significantly enhance the company's capacity and quality.

Naga2 is connected to NagaWorld through Naga CityWalk, and it features 903 hotel rooms, 300 gaming tables, and 2,500 slots, doubling the capacity of NagaWorld. Upon soft opening, approximately 600 hotel rooms and part of the gaming floor were operational, with 30-40 tables active. The remaining facilities are expected to be opened progressively, including eight gaming tables in the lobby and junks starting to move in.

The VIP gaming suites in Naga2 include 38 suites, with 2 penthouses and 36 VIP suites, and the hotel occupancy is well secured due to redirected clients from Naga1 during its renovation.

Key Information

• Stock Price: NagaCorp is currently trading at HK$5.56, which is 50% below the average P/E and EV/EBITDA of its Macau peers.
• Valuation Metrics:
  • FY18E P/E: 11x
  • EV/EBITDA: 6.7x
• Financial Performance:
  • Revenue: US$345 mn (FY13), US$504 mn (FY15), US$532 mn (FY16)
  • Net Profit: US$140 mn (FY13), US$173 mn (FY15), US$184 mn (FY16)
  • EPS: US$0.49 (FY13), US$0.59 (FY15), US$0.55 (FY16)
  • DPS: US$0.33 (FY13), US$0.35 (FY15), US$0.28 (FY16)
  • Dividend Yield: 6.0% (FY15), 5.0% (FY16)
  • ROE: 23.4% (FY13), 25.1% (FY15), 14.7% (FY16)

Main Points

• Product Upgrade: Naga2's soft opening marks a significant upgrade in terms of both size and quality of facilities, aiming to attract more high rollers, particularly from Malaysia and China.
• Cannibalization Concerns: There may be a certain level of cannibalization with Naga1 initially, as the same junkets will operate in both locations. However, the company believes that this is not a major concern, as Naga2's facilities are being progressively expanded.
• Diversification: The report suggests that while the current client base is primarily from Malaysia and China, there is a need for more diversification in junket names to ensure long-term growth.

Valuation Comparison

Investment Ratings

• Industry Rating: OVERWEIGHT (Expect sector to outperform the market over the next 12 months)
• Company Rating: NON RATED

Analysts and Disclosures

• The report was prepared by Angela HAN LEE at China Merchants Securities (HK) Co., Ltd.
• The analysts certify that the views expressed accurately reflect their personal opinions.
• The report is subject to regulatory and legal disclosures, and should not be construed as investment advice.

Conclusion

NagaCorp's Naga2 expansion is a significant step in enhancing the company's offerings and attracting a broader range of high-value clients. While there are concerns about initial cannibalization from Naga1, the company is confident in its ability to leverage the expansion for long-term growth. The current valuation suggests that NagaCorp is trading at a discount compared to its peers, which could present an attractive investment opportunity. However, investors should consider the need for diversification in the client base and the potential for gradual revenue growth.