Scientific Game

The Numbers Game

While Singapore’s casinos falter and Macau’s high-roller trade stagnates, as Indochina correspondent Richard Meyer reports, NagaWorld appears insulated from weakness in China thanks to its concentration on mass play and its niche catering to lower-end VIPs

Wednesday, 19 December 2012 16:56
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NagaWorld is not necessarily looking to draw whales to its casino in Phnom Penh, Cambodia. It would much prefer a few big fish. The way the management sees it, a publicly listed gaming operation needs to carefully build its portfolio of players and take on the right kind of risk. For a company like Naga— although successful, still with only a $1.1 billon market capitalization—that means staying away from players who singlehandedly can ruin a quarter and crash the stock. If one person walks away with massive winnings in a day or two, that could potentially shake confidence in NagaCorp.

“We would rather have 10 rolling in with $100,000 than one with a million,” says Philip Lee, CFO of Hong Kong-listed NagaCorp. “We just don’t want the volatility.”

While much has been made of Naga’s many strengths, such as its location, its monopoly license and its fixed tax rate, the way the company is managed might also be as important in the long run. The bean counters, operations managers and pit bosses will be the ones ultimately who make the property work and keep it from falling into the dangerous traps of the trade. It is no doubt a gaming company, with a lot of flash and no shortage of bells and whistles, literally, but behind the scenes is a dedicated group of no-nonsense businessmen who talk in terms of square meters, drop and turnover. Their business is all about chance, mystery and entertainment, but their focus seems to be on transparency, profit, efficiency and security.

The emphasis on the mundane is especially important for Naga. The company started out with a number of strikes against it. Its location, while an asset now, has not always looked so good on paper. Until recently, Cambodia was seen as a relatively dangerous place, and relatively corrupt and undeveloped. When one of the senior managers moved to Cambodia a number of years ago, his friends asked him if it was even possible to get decent food there, and the manager wasn’t too sure himself. To be taken seriously, Naga has had to be extra careful about what may be an afterthought to others.

One of the main areas of focus, of course, is anti-money laundering (AML). Cambodia has historically been and remains a place of concern regarding illegal financial transactions. It was number 141 out of 144 countries ranked by the Basel Institute on Governance for the risk of money laundering. The institute cited corruption, secrecy in the banking sector and the lack of transparency as reasons for concern. Dollars freely wash around the economy, the borders are porous and banking and government officials can be bribed.

To assuage concerns, Naga has put the issue front and center. It brought aboard Tim McNally, a former FBI special agent and Hong Kong Jockey Club head of security, as chairman; it has commissioned two independent AML audits, in September 2011 and January 2012, by Hill & Associates, a Hong Kong-based risk management consultancy; and it has had employees undergo Certified Anti-Money Laundering Specialist training offered by the Association of Certified Anti- Money Laundering Specialists. The casino is now seen as a local leader in AML best practices and has been asked to advise others in implementing proper procedures.

The fact is, AML is fairly easy to do, as long as a company wants to do it. It’s not like a bank, where a customer’s identity has to be verified and the source of funds determined. It can be as easy as just insisting on, for example, paying out what you get in, a practice scrupulously followed by Naga. If somebody brings cash to the casino, their winnings are disbursed in cash. If a wire comes in, a wire can go out. If a check comes in, a check can be issued. The point is to avoid turning cash into something more legitimate.

NagaWorld has slowly built its credibility. When the financial markets collapsed in 2008, Naga collapsed with them. In fact, it significantly underperformed relative to global markets, dropping to a low of 55 HK cents in 2008 from the high of HK$2.72 in 2007. The company was new to the public markets, listed in 2006 in an IPO, and the Cambodia tourism and recovery story was not yet fully appreciated. Investors ran from Naga.

Now it is very different, with Naga well known and understood by investors, in part because of the proactive investor relations done by management and details provided by it. At the same time, Cambodia has also matured quite a bit. It is no longer seen so much as the Wild East. Significantly, the country is starting to take AML seriously. In 2011, Cambodia publically expressed a desire to fight illegal financial transactions, and it is not on the Financial Action Task Force’s so called Black List—interestingly, Thailand is.

Naga continues to focus on the basics and getting them right, and finding ways to enhance performance. But it is also mindful of the need to rein in costs. The company recently looked into switching to RFID chips, for example, but after running the numbers it concluded that investing in the security-boosting and performance enhancing technology is not yet worth it. Naga did, however, invest in a Bally Casino Management System to evaluate overall performance with the numbers it does have. It also launched its first loyalty program, the Golden Edge Rewards Club, in January 2012

For the time being, the company is happy with the mix. The Vietnam mass market has held up remarkably well despite the economic troubles in the country, and traffic is good from Malaysia.

Naga still likes the mass market and low end VIP market. “Mass market 63%, VIP 36% is an ideal mix,” says Mr Lee. “It gives us the highest profit margin.” But this could start to change. Naga 2 is set to open next to the current Naga in 2015. The new structure will have 1,000 hotel rooms and, significantly, 50 VIP suites, where a player and guests can gamble in what amounts to a small self contained casino. Ground was broken on Naga 2 in November 2012.

One minor concern for the company, but one that irks management, was the opening of border casino operations at Pailin, Cambodia by Entertainment Gaming Asia (EGT) in May this year, and EGT’s plans to open another at Poipet. As EGT is a supplier of electronic gaming machines to Naga, this raises the possibility of EGT poaching customers from Naga. Whether this actually happens, the optics are bad. The EGT concession at Naga is up in 2015 and represents a major part of the US-listed company’s business. Naga executives expressed displeasure, but did not venture to say exactly how they would respond in 2015.

In the past few years, Naga has cemented its position through pragmatism, building its operation by focusing on what works and reducing risk where possible. This has left it in good stead for troubles ahead. As China weakens, place like Macau, which are focused more on high-end China VIP business, could get hit. Naga might find its lower-end strategy and its balanced player portfolio resilient in a challenging environment.

Poised For Continued Growth


According to a reported released by Citi Research (a division of Citigroup Global Markets Inc) in the wake of third-quarter results released by NagaWorld’s Hong Konglisted operator, NagaCorp (3918.HK), the casino’s mass drop rose 32% year-on-year in Q3 2012, while slot handle increased 31% (vs. 37% and 23%, respectively, in the first half of the year). Although VIP rolling volume was up 18% year to date in the first nine months of 2012, volume declined modestly in 3Q, which according to the report was “similar to the sharp deceleration we’ve observed in Macau. However, with over 75% of earnings likely derived from mass-market operations, we anticipate minimal earnings drag from weak VIP trends.” It adds: ”With a number of new property additions in 4Q (including 110 new hotel rooms in the third hotel block, the addition of Saigon Palace, adding nine gaming tables and 150 slots, and five VIP suites), Naga is well positioned to generate continued earnings growth.”

NagaCorp Chairman Timothy McNally said: “We’re pleased with our numbers which show continued, steady growth. Quite honestly, we’re not impacted by what is going on in Europe, North America or in China but we’re definitely still very pleased with double digit growth. We’re very focused on Indochina. If you look at tourism numbers coming into Cambodia, the figures are up 1.7 million in the first half of 2012—that’s a 28% growth, so we’re seeing a lot of growth in Cambodia and it’s coming in not only from Vietnam but from Korea, Laos and all over.”

But Vietnam and Thailand—with their fast growing economies and combined population of almost 160 million—are clearly Naga’s main sources of visitation and primary target markets, especially in the mass segment. “In May 2012, we opened our first office in the business district of Ho Chi Minh City to facilitate our sales and marketing efforts in Vietnam as well as an office in Bangkok,” according to Mr McNally. “These physical offices are critical to our growth strategy within Indochina and positioning ourselves as the region’s entertainment capital. We have also launched wide-reaching marketing and branding campaigns in both of these markets. We believe this will build further NagaWorld’s awareness and critical mass in two of our key target markets.”

Meanwhile, the soon-to-open Saigon Palace mass gaming area “will cater specifically to the needs of our Vietnamese clientele,” according to Naga. The property has seen a 25% year-on-year increase in visitation in the first nine months of 2012, largely driven by a 27% increase in Vietnamese visitors to Cambodia, aided by a new luxury coach service between Phnom Penh and Ho Chi Minh City, launched on 18th May jointly by the Cambodian Tourism Ministry and Naga.

Among NagaWorld’s other revenue-boosting measures over the past year, Mr McNally pointed out: “In February 2012, we launched NagaRock, a lifestyle gaming, entertainment and dining venue targeted towards higher-end mass-market customers. In June 2012, we launched the Rapid 2 gaming area with 92 machines, after our proven success of the Rapid 1 gaming area in the second half of 2011. These rapid gaming areas are popular due to their low-scale options of table gaming. On the junket business, our conservative credit policy, relatively low table limits, and higher rolling commissions to junket operators continues to drive momentum.”

Mr McNally added: “Long term, the completion of Naga 2 will transform NagaWorld into a truly integrated gaming and entertainment destination in Indochina. This will further enable us to offer products and services to the growing economies in the region. This will also benefit Cambodia as our host nation, and in turn, deliver value to our shareholders.”

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