Inside Asian Gaming

inside asian gaming September 2015 34 Naga’s tax rate is negligible, though it paid a supplementary $9.4 million tax assessment this year, part of playing for the long haul. That’s helped put Naga in a sweet spot in the current regional gaming environment. “Still gaga for Naga,” Union Gaming declared earlier this year. While Macau numbers tanked, Naga’s gross gaming revenue last year grew 17% year on year to $381.4 million and 42% in the first half of this year to $255 million. EBITDA last year was up marginally to $176 million, and in the first half rose 53% to $132.8 million. What’s behind the numbers bodes well for continued growth. Enabling cash verification for mass tables means players need not visit the cage to play baccarat with $100 minimums for “squeeze games,” where players can touch the cards. Ongoing introduction of TITO (ticket in-ticket out) technology helped more than double first half machine revenue to $92 million. Naga received a $40 million “negotiating fee” from a contractor to run 300 EGM positions in May, indicative of its strength in that segment, setting the bar high for its other revenue share partners. At the same time, Naga is shifting focus to take advantage of VIP opportunities. It’s built new VIP rooms and posh suites aimed at Macau junkets, luring market leader Suncity and others, though ramp ups have gone slowly. Naga is also moving into mainland China’s mass market, using a pair of Airbus A320 jets it purchased and leases to affiliate Bassaka Air. Working with China International Travel Service, Bassaka has instituted twice weekly service to Changsha, a Tier 2 city in Hunan province, for two-night-stay packages at NagaWorld. Service is expected to expand soon to thrice weekly and extend to Xian in Shaanxi province. Naga is in a uniquely favorable position with regards its China business. Union Gaming estimates 20% of Naga’s gaming revenue comes from mainland Chinese customers, so it’s largely insulated from the negatives plaguing Macau operators. Yet Naga is also poised to penetrate the mainland market as opportunities arise. On the horizon, Naga2 and NagaCity Walk provide further ammunition for an assault on the China market, as well as boosting business from Naga’s core markets. NagaCity Walk, to be operated by China Duty Free Group, is expected to open in the third quarter of next year. The retail mall, designed by Steelman Partners, will connect NagaWorld to $369 million Naga2, a 110,000-square-meter (1.2 million square foot) IR that should be competitive regionally, if not globally. Naga2, which the company says is on schedule to open in late 2017, will add up to 300 tables, 500 machines, 37 VIP salons, 1,000 guest rooms, many of them VIP suites including tables, a 2,100-seat theater and meeting space. Then there’s Russia, where Naga broke ground in May on a $350 million resort in Vladivostok’s Primorsky Integrated Entertainment Zone, attracting domestic and international casino investors. Union Gaming estimates the first phase, to open in 2018, will cost $150 million, have 400 rooms, 100-150 tables and 400 EGMs, plus retail, meeting and entertainment components. Vladivostok is an opportunity in Naga’s wheelhouse as a frontier market, and it may sell more shares to finance the project. Naga also is a bidder for one of South Korea’s casino licenses, indicating that Dr Chen thinks Naga is ready for more conventional markets, and it could become a contender for a regional casino in Japan. “We’ve been a work in progress,” Chairman Timothy McNally says. “But we’ve arrived.” And today’s Naga is no Proton. VIP baccarat’s share of Macau’s gross gaming revenue hit a peak of 74% in the third quarter of 2011, but has declined steadily since then. Last month, it accounted for 52% of reported revenue. However, owing to the move by casinos to reclassify a good chunk of their premium-mass business as VIP following the total smoking ban on all Macau main-floor gaming areas in October, a truer adjusted estimate of VIP’s current share of total revenue is around 46%. So the mass Nicholas Niglio Executive Director and CEO Neptune Group market now—as of Q3 2015—outweighs the VIP segment, something that just three years ago seemed unlikely to happen this side of 2030. While Macau’s junket operators—who supply the city’s casinos with the vast majority of their VIP players—have been reeling under the sector’s slowdown, it’s the smaller ones that appear to be hurting most, while the larger ones, including Top 3-ranked Neptune Group, are likely to weather the storm. Though pessimism prevails on expectations of the junkets ever returning to their former glory—as Las Vegas Sands Corp’s Rob Goldstein noted, “I hope the junkets resurrect, but right now it doesn’t look promising”—it’s early days yet in Macau’s evolution, and the junkets could yet find renewed vigor, most likely via diversification. The eight years in which Nicholas Niglio’s been in charge at Neptune have seen the company grow not only in size but in scale. In addition to a comprehensive range of travel and hospitality services