Betting On Donaco

By James Carlisle | More Articles by James Carlisle

This owner of casinos in Cambodia and Vietnam seems a strange business to have listed on the ASX, so we decided to take a look.

After constructing its 5 star Aristo Hotel resort in 2014 – located on the Vietnamese border opposite China’s Yunnan province which has a population of 48m people – Donaco purchased the Star Vegas resort in Poipet, Cambodia in July 2015. Star Vegas now represents the majority of Donaco’s revenue and, being on the Thai border three hours’ drive east of Bangkok, it primarily caters to Thai gamblers.

Most Asian casinos are already on the nose with investors due to concerns over the Chinese economy and its government’s crackdown on corruption, which has devastated Macau’s gross gambling revenue and, in particular, its VIP market. Donaco’s disappointing first-half result along with the announcement that its deal with Macau-based junket operator Heng Sheng has been cancelled has helped its share decline 34%. Yet I think investors are overreacting and the company’s future remains promising.

Promising future

One concern has been the consistently below theoretical win rate earned on VIP gambling at the Aristo. Along with concentrating on attracting more smaller players, the Aristo has just entered into a revenue share deal for VIP tables with a junket that reduces the risk of loss from low win rates.

In any case, the performance of Star Vegas will determine the company’s future over the medium term. Despite the cancellation of the Heng Sheng deal – which would have added 30 VIP tables and increased turnover by 30% – Star Vegas management is trying to attract more Thai junkets to its facility (only three of the 100 in total currently operate at Star Vegas).

Even so, demand from Thai players is already high enough that it’s negotiating to expand into the Star Paradise hotel next door. If this occurs, it should be ‘highly accretive’ to earnings per share.

Improved infrastructure including new highways have made it easier to travel to both of Donaco’s casinos and a potential expansion of the Thailand/Cambodia border gate opening hours is another positive for Star Vegas. Despite the macroeconomic concerns over China’s transition from a fixed-investment based economy to one led by consumption, steady increases in the standard of living as south-east Asian economies continue to develop provides further opportunities for Donaco.

Of course, other than the currency risks – exacerbated by revenue and costs being in different currencies – investors should also consider the dependence on essentially one casino and the potential for changes in taxes and regulations.

Risks priced in

Selling on an enterprise value to earnings before interest, tax, depreciation and amortisation multiple of 5, though, I believe these risks are priced in and judging by their share purchases after the interim result, it appears insiders agree.

Donaco’s current share price also doesn’t price in any potential growth in earnings as it expands and likely increases in its ‘yields’ (or average revenue per table per day) over the longer term.

Like the Aristo, Star Vegas requires minimal capital expenditure over the next five years or so. Once Donaco has sufficiently reduced its minimal net debt, it will likely turn its free cash flow towards capital management via dividends and/or share purchases.

Disclosure: The Intelligent Investor Separately Managed Accounts may own shares mentioned in this article. Staff, including the author, own many of the stocks mentioned. James Carlisle is research director of Intelligent Investor. This article contains general investment advice only (under AFSL 282288). 

James Carlisle

About James Carlisle

James Carlisle has been researching stocks for more than two decades. After qualifying as a lawyer and working as a fund manager in London, James moved to Australia in 2002 and soon found Intelligent Investor. He is the author of the book: 'Value: Intelligent Investor’s Guide to Finding Hidden Gems on the Sharemarket' and covers the banking and financial services sectors.

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