Take a Flyer on This Asian Casino

03/25/2009 11:42 am EST


Yiannis Mostrous

Editor, The Capitalist Times

Yiannis Mostrous, editor of The Silk Road Investor sees opportunity in the shares of a Cambodian casino operator, but it’s not without risk.

My expectation is that Asia will come out of the crisis in a much better position relative to its own history as well as to other developed economies. Asia entered the crisis with balanced or surplus trade positions, subdued credit cycles, and low debt levels.

Its banking system is minimally exposed to “toxic assets,” so the current recession is simply a cyclical issue for the region. The opposite is true in the developed economies—especially for the Anglo-Saxon economic growth models—where the challenges are more systemic in nature.

Cambodia-based casino/hotel operator Naga Corp’s (Hong Kong: 3918, OTC: NGCRF) results offered no surprises; net profit was down 20%. The main reason was the termination of a contract between Naga and Poibos, a South Korea-based entertainment company. Poibos had committed to pay Naga $25.2 million per year for the use of 30 gaming tables, from which Naga received $12.6 million.

Although this is a clear drawback in short-term cash flow generation, it doesn't alter the operational side of the business, which remains strong. The company continues to attract local players, who account for 45% of revenue.

Naga remains in talks with Harrah’s Entertainment (which went private in a leveraged buyout that closed in early 2008—Editor)regarding future cooperation plans and is also negotiating with operators in Macau. That said, Naga’s accounts receivables increased to $66 million from $34 million in 2007, as payments from casino trip operators have slowed.

But the company is still in a net cash position (24% of market capitalization) and has no debt. In addition, during the last quarter of 2008, Naga bought back 4.7 million shares; Chief executive officer Lip Keong Chen, who owns 63% of the company, also added to his stake. These are indications that people involved in the business are still confident in the company’s long-term prospects.

Another important positive is Naga’s monopoly status—it’s the exclusive licensed casino operator within a 200-kilometer radius of Phnom Penh and should remain so until 2035.

Furthermore, the company is ideally positioned to be the "Poor Man's VIP" experience, offering first-class services at much lower prices than those you’ll find in Macau.

Looking at the macro picture, Naga carries risks inherent in a truly emerging market. It’s the only company investors can own in Cambodia, a country with a turbulent political past still in the early stages of economic development. Be aware of the risks such an investment entails.

Naga remains, however, the perfect way to get exposure to an exciting emerging market opportunity in which the rewards can be substantial. And Naga offers a sustainable, 10% dividend yield. Naga Corp is a Buy.

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