“Gambling in a top Asian tourist destination”

By Travis Johnson, Stock Gumshoe, June 11, 2008

I promised to close out the look at the Asian Growth Stocks ad and see which company was teased by Bryan Tycango … and this third Asian stock recommendation sounds like it has some potential — Tycango says it could triple your money in 18 months.

So what is the spiel?

“Asians love to gamble. 80% of vegas high rollers are Asians.”

OK, nothing we haven’t heard before …

What’s the company that caters to these gamblers?

It’s a “tiny company with a 28-year exclusive monopoly to operate gambling casinos in a top Asian tourist destination. It’s within 3 hours flying time of 2 billion people.”

I’m getting a feeling of deja vu here.

“The company started on a shoestring and set up their first casino on a floating barge, and they’re making money hand over fist … they’re packed 24 hours a day, and their average table grosses twice what the typical table in Las Vegas or Atlantic City grosses.”

Hmm, yes, sounds veeerrrryyy familiar. More specifics?

“They’re building a 508 room, 5 star hotel right next to the casino. This should boost revenues even higher because hardcore gamblers like to gamble 12 to 16 hours a day, crash for a few hours, then come right back. A nice hotel right next door is perfect for them.”

“Earnings are already rising 30% year to year.”

“I’m expecting their profits and share price to triple over the next two years. And they have a 28-year monopoly granted by the government, their long term potential is staggering. The shares are currently just a mere 24 cents.”

Yep, this is our old friend … but perhaps you missed that earlier writeup a few weeks back, so let’s continue …

Tycango throws some raw meat on the plate for us:

“How high can these shares go? One of the early US gambling casinos — Resorts International — rose from 4 to 209 after it went public. This company has that same incredible potential.”

OK, so the Thinkolator can stay in the shed for this one … the company we’re talking about here is …

NagaCorp (3918 in Hong Kong, NGCRF on the pink sheets), owner and operator of the Nagaworld casino in Cambodia.

I wrote about this one back in early May, when it was teased by Silk Road Investor. The shares have spiked up and come back down a little bit since then, but I still own shares and still have basically the same perspective on the company — you can see my earlier writeup here for much more detail about them. Tycango teases them as trading for 24 cents (US), but that’s no longer accurate — last trade in Hong Kong this morning was HKD 2.31, which is almost exactly 30 cents.

For those who don’t want to go back in time to read that article, NagaCorp is a casino company controlled by Chen Lip Keong, a tycoon who I think is based in Malaysia. The casino and the casino rights that they hold are centered on Phnom Penh, Cambodia … so it’s not exactly the premier Cambodian tourist location (that would be Angkor Wat), but it is the biggest city in the country, and the gateway for many tourists.

I continue to own shares because I’m generally a sucker for companies that are controlled by wealthy investors whose interests are aligned with common shareholders. In this case, the shareholder-friendliness comes in the form of a healthy dividend — they’ve promised to dividend out at least half of their earnings, and they are quite motivated to do so because that’s how Keong can keep his 60%+ control of the company yet still get some of his capital out. So the dividend is healthy and growing, along with earnings.

That certainly doesn’t guarantee success, and since Keong controls the company he can do whatever he wants, even if that doesn’t happen to be the same thing other shareholders want. So far, it’s working fine, but there’s no guarantee. The casino continues to grow, though it does depend significantly on organizers of casino tour groups who bring their big gamblers to various casinos in the region in exchange for commissions, so there is certainly competition with other, much glitzier regional casino centers, including Macau and, soon, Singapore. Phnom Penh is not going to be able to compete with Macau or Singapore in my lifetime, but there appears to me to be room for junket destinations that are different, or smaller scale, or closer for some people, and for casinos that offer more to mid-size gamblers as Nagaworld seems to do.

Just one note on that “higher table rates than Atlantic City or Las Vegas” bit — keep in mind that while US casinos typically rake in a huge portion of their earnings from slot machines, the big draw in most Asian casinos are table games, so there’s little point in comparing the two. Table games are essentially everything for NagaWorld, they don’t make any money from the hotel or catering (yet, at least), nor do they focus much on gaming machines because of the preferences of their clientele (wouldn’t be surprised to see this change a bit with new generations of gamblers, but it will probably be very gradual).

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If you’re interested in this one, please do read the older article — it had some good cautionary comments from other readers who are less optimistic about the company than I am, including some folks who know much more about Cambodia than I do. This is certainly a risky play, albeit one that is backstopped by a friendly regulatory environment (at least for now) and a good dividend.