Monday, April 25, 2016

How to invest in a government mandated monopoly

If you ask most people what they think about monopolies they will more than likely respond that they are against them. In the US and most every western country monopolies are not allowed. However, what if I can show you a legal way to take advantage of a government mandated monopoly? Would you be interested?

First of all what is a monopoly? A monopoly is; "the exclusive possession or control of the supply or trade in a commodity or service."

NagaCorp is a gaming company based in Hong Kong. The company's principle asset is the NagaWorld casino entertainment complex in downtown Phonom Penh, Cambodia. From the NagaCorp website:

NagaWorld consists of some 1 million square feet and approximately 700 Suites and Deluxe Rooms, public and premium gaming halls, an all-suite luxury spa, shopping gallery, 19 food and beverage outlets, extensive entertainment services and premium meeting spaces with state-of-the-art facilities, as well as one of the country's largest hotel convention spaces that can accommodate more than 1,000 delegates.

NagaWorld has a 40 year monopoly 

What makes this investment so attractive is the following fact; a 70-year casino licence that will run till 2065, as well as a 41-year monopoly within a 200km radius of Phnom Penh that expires in 2035. That's right no one can build a casino within 125 miles of NagaWolrd for 41 years! 

Here are the key facts from NagaCorp's 2015 annual report:

Net profit of US$173 million, a 27% increase over last year. Gross Gaming Revenue (“GGR”) for the year increased by 26% to US$481 million.

International tourist arrivals to Cambodia continued to follow their growth trajectory, recording 4.8 million visitors in 2015, an increase of 6% compared to 2014. Visitor arrivals at the Phnom Penh International Airport increased by 17% over the same period. Visitors from Vietnam (21%), China (15%) and Lao PDR (9%) collectively accounted for 44% of total tourist arrivals to Cambodia. The appeal of Cambodia as a travel destination for Chinese tourists is evident from a 24% increase year-on-year to 694,712 visitors in 2015.

In addition to the currently operating NagaWorld the company has several other projects under construction.

NagaWolrd2 which is right across the street from the current NagaWolrd. The idea for NagaWorld is the following:

The existing NagaWorld complex is reaching full capacity, with 80-90% room occupancy on a regular basis as it caters to gamblers, tourists, tour groups, walk-ins and the general public. As such, NagaCorp has decided to develop Naga2 (costing US$369 million), which will be situated a stone's throw away from the current premises. The development of Naga2 has a total built-up area of approximately 110,105 square metres, which includes the NagaCity Walk with approximately 13,248 square metres of retail and public space, and the TSCLK Complex which features approximately 1,000 hotel rooms, 38 luxury VIP suites, a multipurpose-entertainment/theatre with a seating capacity of approximately 2,100; and additional gaming space (up to 300 gaming tables and 500 electronic gaming machines).

Here is a map on how this will all look when completed.

NagaCorp is also building Nagawalk which will basically connect NagaWorld and NagaWorld2. This will consist of duty free shops.

The company is also building a casino in Vladivostok Russia which is the capital of the Russian Far East. 

The PERC Project is not expected to be operational before 2018 and will be expected to be the Group's next growth catalyst. The Group believes that its participation in an exciting new casino market in a different geographical region will diversify and enhance the Group's results in the long term.

The company has committed to paying out around 60% of earnings in dividends. This amounts to a yield of around 5.25%. 

Cambodia is a growing frontier market and as the country continues to grow and modernize expect more tourist traffic especially from China. Overall I think this is one you just buy and come back in ten years and it is worth a lot more than you paid. The symbol is NGCRF on the OTBB.

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