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Hopes of a continuing streak with Naga’s second location

Traffic passes in front of Naga 2 Casino and Hotel complex yesterday in Phnom Penh.
Traffic passes in front of Naga 2 Casino and Hotel complex yesterday in Phnom Penh. Heng Chivoan

Hopes of a continuing streak with Naga’s second location

Gaming analysts are bullish on the prospects of Naga 2, a massive $369 million hotel and gaming extension to the NagaWorld casino and resort in Phnom Penh, providing that the new facility can attract a stream of high-rollers through increased junket activities and promotional campaigns which aim to cement it as a premier Asean gambling destination.

The entertainment complex, which concluded its lavish soft opening over the weekend, boasts an additional 900 rooms and is expected to have 300 gaming tables and 2,500 electronic gaming machines when it is fully operational. Owned by Hong Kong-listed parent company NagaCorp, Naga 2 is connected to the company’s flagship casino through a subterranean duty-free shopping complex known as NagaCity Walk.

Together with NagaWorld, the full complex will have a total of 1,600 rooms, nearly 560 gaming tables and slightly fewer than 3,000 electronic gaming machines, as well as numerous restaurants, spa facilities, ballrooms and exhibition spaces.

Michael Ting, a gaming analyst at CIMB Securities in Hong Kong, said that the success of Naga 2 will hinge on the company building off its already wildly successful NagaWorld development.

“[The complex will have to] increase connectivity with China, such as more charter flights. [Having] more promotional campaigns in Asean countries [and] getting more junkets into the property [to] push the VIP segment,” he said in an email.

He explained that with NagaCorp registering zero debt on its financial statements, it is in a strong profitability position and has enough cash flow to expand junket operations and regional partnerships. Additionally, an increase in Chinese tourism to Cambodia will help boost both mass market and VIP growth.

“Naga 2 symbolizes another step towards tourism development, and is good for Cambodia overall,” he said. “If Cambodia can continue to develop tourism over the next few years, [the casino] will eventually become a regional destination.”

He added that while the NagaCorp casinos are currently operating in a niche market, this is only because Cambodia has not seen a cluster effect like that which typically develops when multiple properties spring up as they have in Singapore, Macau and the Philippines.

NagaCorp has been on a hot streak in Cambodia, bolstering its profits over the past 20 years thanks to a highly favourable tax arrangement with the Cambodian government and a 41-year monopoly on gambling within a 200-kilometre radius of Phnom Penh until 2035.

The monopoly has helped put the Malaysian chief executive, Chen Lip Keong, back on the Forbes list of the world’s billionaires early this year after a two-year absence. According to Forbes, his net worth stands at $2.8 billion as of November.

Grant Govertsen, head of Asia equity research for brokerage firm Union Gaming Securities Asia Ltd, stood by his firm’s projection that Naga 2 would produce $113 million in total earnings reported before interest, taxation, depreciation and amortisation (EBITDA) during its first full year of operations.

“It is important to keep in mind that Naga 2 is going to be of significantly higher quality than the original NagaWorld in order to cater to a higher-caliber customer,” he said in an email. “The original NagaWorld has been an extremely impressive property insofar as it generates high levels of revenue and cash flows. However, it was not designed with a premium customer in mind.”

He added that with the Naga 2 development, the casino operator has focused primarily on the premium customer, which will likely result in a significant boost in VIP visitation not only from China, but from various points in Southeast Asia.

Lorien Pilling, director at Global Betting and Gaming Consultants in the UK, said that while NagaCorp runs some risk of cannibalisation amongst the mass market segment during its first six months of operations as gamblers test out the new gaming floor, the firm has more flexibility with its VIP segment as it can simply reduce or increase revenue depending on the number of junket players it accepts.

Nevertheless, he added that the opening of Naga 2 has been essential for the company’s maintained growth.

“Naga 2 was needed to help the company continue to compete in the Asian gaming sector. Cambodia benefitted from Macau’s difficulties, but now Macau is recovering,” he said. “Operators cannot stand still in this market, so Naga 2 was necessary and is opening at the right time.”

While NagaCorp has made impressive gains in the Cambodian market, it has not grown without scrutiny. From 2003 until 2014, the firm paid an effective tax rate of less than 2 percent, buoyed by a 2006 agreement that granted it a seven-year grace period to complete construction on NagaWorld without incurring tax on non-gaming operations.

Once the agreement ended, the Ministry of Economy and Finance (MEF) began its first-ever audit of the casino complex, slapping it with an additional $16.6 million in unpaid taxes, raising the effective tax rate for 2016 to 6.7 percent. Earlier this year, Ros Phirun, deputy director-general of the MEF’s Finance Industry Department, told The Post that NagaCorp would be on the hook for at least an additional $16 million annually just for its NagaWorld operations. Contacted yesterday, Phirun reaffirmed that Naga 2 would be subject to more stringent government scrutiny.

“As soon as Naga 2 officially starts operating, we will begin inspecting the casino as soon as possible and will proportionally apply taxes on all non-gaming operations,” he said.

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