Scientific Game

Hard Times Ahead?

Cambodia’s two publicly listed gaming operators reported weak results in the first quarter. As Indochina correspondent Richard Meyer reports, it appears too soon to tell whether the quarter was a one-off or a trend

Friday, 21 June 2013 16:23
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The latest earnings announcements from two gaming companies with significant Cambodia operations indicate softness in their businesses. It is not exactly clear why the numbers were off—no single factor was identified in disclosure statements and company executives would not comment—though sector analysts were not overly concerned. Nevertheless, the fact that both companies reported weakness in the same quarter raises questions about the state of the market and leaves investors waiting for more data to determine where it’s headed.

Nasdaq-listed Entertainment Gaming Asia (EGT) reported 1Q net revenues from slot operations in Cambodia were down 16.6% year on year to US$3.24 million, while its win per unit per day in the country dropped 26%. Revenue from EGT’s slot operations at NagaWorld were $3.1 million, down $776,000 from the same period a year earlier, with daily average net win per machine there falling from $260 to $217. EGT’s revenues from casino operations dropped to $1.1 million from $1.2 million in the prior year while earnings before interest, taxes, depreciation and amortization fell 38.7% to $1.9 million (from $3.1 million). The company’s income from continuing operations swung from $935,000 in the first three months of 2012 to a loss of $288,000 in 1Q 2013. EGT declined our request for an interview, saying that it would prefer to speak once Dreamworld Poipet begins to impact results. The new $7.5 million slot hall had its soft opening at the very end of the first quarter on 28th March and its grand opening on 9th May. The site is on the Thai-Cambodia border and has about 300 gaming machines.

In its earnings conference call and in public documents, EGT explained the results were partially the result of a second mourning period held 1st to 7th February for King Norodom Sihanouk, who died in Beijing on 15th October 2012. During that time, all places of entertainment were shut. The company’s SEC disclosures also mentioned a labor dispute at NagaWorld. At the end of February, an estimated 1,000 workers staged a strike demanding higher wages, the reinstatement of fired workers and the dismissal of a number of managers. EGT is highly dependent on NagaWorld. At the end of 2012, a full 46% of its electronic gaming machines were at Naga, delivering 76% of the company’s slot revenues and 43% of consolidated revenues.

It is also important to note that NagaCorp increased the number of gaming machines in its casino in 2012, from 1,130 at the beginning of the year to 1,470 at the end. According to one analyst, this could be part of the reason for the drop in the average net win number on legacy machines such as those provided by EGT.


While there is little official analyst coverage of EGT, those who observe the company peripherally note that the overall picture is a positive one. For example, Naga’s major ramp up in slot numbers seems to have come to an end, and it appears the dip in average win per machine may have been a temporary one. The company noted in a conference call to analysts that net win per machine at Naga had jumped back to $276 in April.

According to Grant Govertsen, managing partner at Union Gaming Research Macau, “Poipet isn’t contributing yet, but it does seem that the sister project in Pailin is starting to ramp up—$1.1 million in revenue in the first quarter of 2013 versus $1.8 million in all of 2012. Yes, Pailin’s revenues were down a bit sequentially from the fourth quarter, but they are still trying to figure out the market. I’ve been to Pailin and can speak to the strong demand story. I think Pailin, sooner rather than later, will prove to be a successful part of the EGT story. Same goes for Poipet, where the demand story is even stronger as it represents the closest legal gaming to Bangkok. It, of course, will take time to ramp up, but should get there quicker than Pailin.”

NagaCorp also reported a few numbers in the first quarter that could indicate some weakness. While public floor gaming was up 22% year on year (according to unaudited operational results filed with the Hong Kong Stock Exchange) and EGM “bills in” were up 14%, junket VIP rolling volume was down 11% (it was up 16.9% in 2011 and 12.2% in 4Q 2012). Hotel occupancy was also off, though the rate charged was up.

Analysts are mixed on the stock. Union’s Grant Govertsen says that the first quarter numbers should be adjusted to account for the king’s funeral and the leap year in 2012. When he factors them in, he comes up with only a 6% decline in VIP. He also believes that the company’s recent HK$1.21 billion fund-raising effort will significantly shore up the VIP side of the business. The money will go toward building a private airport terminal, improving airport transportation services, upgrading VIP rooms and marketing in the region.

Others are in more of a wait-and-see mode. They believe that a lot rides on the ability of the company to effectively strengthen VIP—a part of the business that has been declining as a percentage of total revenues for a number of years. Naga would like to more than double VIP spending over a three-year period, but until progress is made, price targets for the stock will likely remain in the HK$6 range. “There’s no near-term reason to own until we see progress on the new VIP initiatives,” according to Michael Beer, an analyst at Citi. “The mass story is in the stock, and the VIP trends in the first quarter are concerning.”

While labor disputes bring into doubt the low-cost element of the case for Cambodia, the country’s other advantages remain, including its very low gaming tax rate—NagaCorp pays an effective rate of 2%, while operators in Macau face 39%—and proximity to several Asian nations, including Vietnam, Thailand and China, where casinos are either banned or off limits to locals. Also, tourism is growing steadily, suggesting the soft 1Q performance could be temporary. Overall visitor numbers were up 17.8% year on year in the first quarter and 18.3% in March. Encouragingly, the major markets for gaming traffic are holding up nicely. Visitor arrivals from China were up 55.1% year on year in the first quarter and 60.5% in March, and arrivals from Thailand grew 31.4% in 1Q. Arrivals from Vietnam—the top source of visitors to Cambodia and players at NagaWorld—were up 1.8% in the first quarter and 7.8% in March.

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