Nagacorp operates the only casino in Cambodia through a monopoly license until 2045. It has several competitive advantages over casinos in Macau and other markets, including much lower operating costs due to lower wages and taxes in Cambodia. While the casino is currently closed due to COVID, the document argues that Nagacorp is undervalued given its long-term license, expected reopening in October, and potential for growth through a planned expansion. The analyst provides earnings estimates and price targets suggesting significant upside for the stock as business recovers over the next few years.

1. NagaCorp 3918 HK
The casino operator in Cambodia Nagacorp is a disruptor in the Asian casino market, especially
Macau. The share price is under pressure trading close to its lowest level in March 2020 and -
50% from the top during late 2019 only because the casino is currently closed. Would you like
to go back to March 2020 and buy high-quality assets at bargain prices? Then, this is your
opportunity!
I agree that a casino is a commodity business, however, Nagacorp has competitive advantages
that make it unique:
1. Monopoly license: Nagacorp operates a casino in Phnom Penh with a long-term license that
expires in 2065 and a monopoly within a 200km radius of Phnom Penh that expires in 2045,
with no limits on the amount of gaming space, tables or type of games. Macau has a
limitation on the number of tables and requires a periodic license renewal.
2. Low-cost player: A casino is a labor-intensive business. Wages, building costs, services… the
running cost is much lower in Cambodia. This offers a better value for money than the other
places, e.g., a croupier earns $3.500/month in Macau while the same dealer earns $400-
$500/month in Cambodia.
3. Low-tax country: Macau pays 35% of GGR (Gross Gaming Revenues) + 2-3% variable as
public development and social related contributions. Singapore 5% of VIP Market GGR and
15% of Mass Market. Philippines 17% VIP and 27% Mass and Vietnam 15% VIP and 35%
Mass. On the contrary, Nagacorp only pays 4% VIP and 7% Mass. Moreover, casinos in
Cambodia are exempt from corporate tax rate, while they pay 12% in Macao, 17% in
Singapore, 30% in Philippines and 20% in Vietnam. The low-tax and low-cost on the country
allow outsized returns on invested capital (i.e. 30% ROE)
4. Location: Cambodia is located in southeast Asia and is bordered by Thailand, Laos and
Vietnam. NagaWorld is in the capital, close to the main airport. The population within a one-
hour flight of Phnom Penh is over 165 million. Main Chinese cities are < three-hour flight.
5. Excellent business relation with Junkets: There are two big markets. Mass Market, mostly
driven by tourism and expat, while VIP market, (72% of Gross Gaming Revenue in 2019) is
propelled by “casino junkets”. Junkets are more than travel agents for high rollers. They
provide funding (hard for Chinese to get money out of China), arrange private games (rent
rooms from Nagacorp and share its profits) and other services. Due to Nagacorp’s
competitive advantage from gaming tax and low-cost country, it can pay higher commissions
(1.8% effective VIP commission rate vs 1.2% in Macau - Macao commission is restricted to
regulation) while maintaining the highest margins. (2019 numbers: Nagacorp 32.6% EBIT
Margin, Sands China 25.8% margin, Wynn Macau 17.8% margin)
6. Growth: Nagacorp first opened in 1995 a casino-vessel on the Mekong river. In 2003,
Nagacorp built NagaWorld replacing its maritime vessel with a luxury resort (Naga1) that
has recently been refurbished. In 2017, Nagacorp opened Naga2, which added 900 hotel
rooms to the 700 rooms in Naga 1 and more than doubled the number of gambling tables
to 500. Since the opening, Nagacorp VIP business increased 450% in three years as 4 of the
5 biggest Macao junkets signed with them. Due to the success, Nagacorp is building Naga3
(scheduled to late 2025) which will more than double the current number of gaming tables,
retail space and gross floor area.
7. Corporate governance: Nagacorp’s controlling shareholder, the founder Dr. Chen, owns
67% of the company. Nagacorp’s Chairman is Timothy Patrick and he was a Special Agent of
the Federal Bureau of Investigation (“FBI”) for almost 25 years. He brought the AML (Anti

2. money laundering) from Las Vegas. Moreover, Nagacorp pays 60% of its annual profit as a
dividend. Since the IPO (2006), $1.5bn were handed out in dividends out of $2.3bn profits
(compared to $3.9bn of current market cap).
8. Risks:
a. Regulatory risk: Low. 70-year-old Dr. Chen has a very good relationship with
Cambodian government and his son is involved too. Nagacorp is the highest labor
provider. In 2018, it represented 23% of local GDP tourism and 1.3% of Cambodia’s
GDP. In 2019, Nagacorp extended its monopolistic license from 2035 to 2045 and
during 2020 Cambodia leased 75 hectare-land near Angkor Wat in Siem Reap (major
Cambodia’s tourism draw) where Nagacorp expects to build a water theme park,
two hotels with a total of 700 5-star rooms, a boating canal system, China Town and
an indoor interactive Hi-Tech Theme Park. (UNESCO has delayed this project
because it does not fit their standards and it is only at 500 meters of the restricted
zone. Nagacorp is seeking some changes in order to go ahead with the project).
Finally, the government of Cambodia draw a draft that will be effective in 2022 and
reaffirmed the monopolistic license by law and a new casino tax-regulation that
ensures Nagacorp low-tax competitive advantage.
b. Country risk: Medium. After a long period of war, the king of Cambodia was
restored. Since then, Cambodia has experienced political stability through a
multiparty democracy under a constitutional monarchy. The Prime Minister Hun
Sen is in charge since 1996 and has consecutively won the elections every five years
(the last being in 2018). Cambodia has raised by >7% CAGR last 25 years being the
sixth highest growing-country in the world thanks to Chinese support (the Belt and
Road Initiative). Cambodia is indeed heavily influenced by China.
c. Company risk: Low. The debt markets were closed for Nagacorp until 2018 when
they issued a bond of $300M 9.375% Senior Notes Due 2021 in order to provide
credit to its VIP Market segment. Last year they issued $350M 7.95% Senior Notes
Due 2024 and they issued additional $200M 2024 maturity at 6.625% a few weeks
ago. I think this reduction in the debt cost implies a lower WACC and a higher
valuation multiple. (Historically, Nagacorp has traded at 8-10x EBITDA vs 15-18x
Macao peers)
d. COVID: Temporary. Cambodia is ranked the second most vaccinated nation among
ASEAN after Singapore. About 99% of Phnom Penh’s adult population is fully
vaccinated being one of the most vaccinated capital in the world. The government
expects to have more than 80% of the people vaccinated before the end of the year.
High vaccination rates are working with new daily infected cases declined to 400 vs
peak of 1130 cases in June 2021. The feedback I’ve got is that government is
planning to reopen the schools by mid/end of September and the Casino will open
during October. It is fair to say that Covid is pressing the business as the casino is
closed since last 2nd
March 2021. In 2020 they were closed for more than 3 months
but Nagacorp reported $102M profit, $45M of FCF and paid 92% of the profit as a
dividend. The VIP market was down 52% because the flights were restricted and
taking into account that their customers 50% from China and the remaining 50%
from Vietnam, Philippines and Thailand, while the Mass segment held on better due
to the expat (people that own business in Cambodia and are regular players). Note
that local people are not allowed to enter in the casino by law.
e. Capital increase: Low Nagacorp has a healthy balance sheet (0.8x 2020 EBITDA and
0.3x taking 2019 EBITDA). Naga 3 project is demand-driven and they might delay or

3. downsize the project. The project will be financed 50% from Nagacorp cashflow and
50% by the controlling shareholder that will sell his stake to Nagacorp through a
capital increase at 12 HKD (>20% premium on the announcement day and 64% at
today’s prices). Dr. Chen will increase his stake from 66% to 74% by late 2025. On
top of that, Dr. Chen has bought $79M on the secondary market during 2020 and
an extra $10M over the last week which supports our theory that a capital increase
is not needed. Naga3 is a big project, but the largest part of the capex needed
($3.5bn the whole project, $1.75bn Nagacorp stake) can be funded from internal
cashflow from 2022 to 2025 (they can reduce the payout for a couple of years) and
they now have access to cheap debt. Before Covid, Nagacorp expected to grow 10%
its topline and 8% its COGS from 2019 to 2025 generating $1.85bn of excess FCF
showing that they would fund their part only using internal cashflow while paying
60% of their profits as a dividend.
9. Internal estimates: We expect Nagacorp achieving 2019 revenue on 2H 2023. Nagacorp is
trading at less than 9x 2023 PE and less than 7x 2023 EV/EBITDA (assuming -5% EBITDA
growth compared to 2019 and -21% profit growth -new tax regulation effect-, which I agree
is conservative, especially taking as a reference how Nagacorp behaved on 2009 slowdown).
I forecast 60%-80% upside by the end of 2023 and >400% upside by the end of 2027 (28%
CAGR) when I expect Naga3 fully operating.
Nagacorp is a unique business well protected by a monopolistic license until 2045 that benefits
from the Asia growing and gambling structural trend. The company operates in a low-cost and
low-tax country that allows them to attract gamblers and generate outsized returns on invested
capital. The company is trading at Covid lows despite the debt market considers it safer and low-
risky.
Gabriel Castro, CFA