A Way to Bet on Asia’s Growth

12/17/2008 11:24 am EST


Yiannis Mostrous

Editor, The Capitalist Times

Yiannis Mostrous, editor of Silk Road Investor, looks for big returns from an up-and-coming casino operator.

Asia has fallen by 65% from high to low, although we're currently off those lows. Only 1974 (when inflation was above 20%) with an 86 % drop and the Thailand collapse in 1998 (the Thai SET Index declined 70%) have been bigger.

The market is coming back from extremely oversold levels and, short-term volatility notwithstanding, a strong rebound next year is in the cards.

Cambodia-based casino operator Naga Corp (Hong Kong: 3918, OTC: NGCRF) merits special mention as it carries risk inherent in a truly emerging market. It's the only company investors can own in Cambodia, and given this country's turbulent political past and the fact that it's still in its early stages of economic development, you should be aware of the risks such an investment entails.

Still, Naga remains the perfect way to get exposure to an exciting, pure emerging market opportunity in which the rewards can be substantial.

Naga's advantage is that it focuses on middle-of-the-pack VIP gamblers, mainly from Malaysia, China, Singapore, and Vietnam. The minimum check-in amount for these players is only US $5,000 (versus $50,000 to $2 million in Macau).

Because Naga has spent far less than other casino operators in developing its property—prices are lower in Cambodia—it's in a position to also offer more concessions to its VIP clientele. The company's 300-room hotel also has provided a steady revenue stream since its completion in September. Its services and facilities are of international standards for a very reasonable $120 per night.

Naga has a major tax advantage, with an effective tax rate of around 3 %, a far cry from what Macau operators are paying at 40%. This tax agreement is valid until 2018.

The company has no plans for future expansion: All its facilities are completed, with extra cash being designated for dividend payments. Management has said repeatedly that payout ratios will stay elevated. The dividend yield is now at 12%, supported by strong cash flows.

The balance sheet remains clean with no debt and $47 million in cash. For comparison purposes, the company's revenues for 2008 are expected to be around $140 million, while [it enjoys] operating margins around 22%.

As always, I prefer the local shares—when we can get them—to the over-the-counter (OTC) listing. And because Hong Kong is easily tradable through serious brokers in the US, I strongly recommend buying the stock locally.

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