PHNOM PENH -- NagaCorp is planning its third casino project in Phnom Penh to tap the growing numbers of free-spending Chinese tourists to the country. But with a price tag equal to almost a sixth of Cambodia's GDP, analysts are questioning the viability of the project.
In a filing with the Hong Kong stock exchange on Sunday, NagaCorp said it will spend $3.5 billion to build a hotel and casino resort that will boast over half a million square meters of floor space when finished in 2025. The figure excludes land costs.
The company, which has a monopoly casino license in Phnom Penh that runs until 2035, is in the midst of an earnings hot streak, having posted a record profit last year on strong gaming revenue at its Naga 1 and Naga 2 casino complexes, which opened in 2003 and 2017, respectively.
Analysts, however, point to concerns about funding for the massive new development, dubbed Naga 3, and fierce competition for players, both regionally and from nearby Sihanoukville on Cambodia's southern coast, which is fast becoming a major destination for Chinese gamblers.
Shaun McCamley, a managing partner at Euro Pacific Asia Consulting, said it is hard to justify an expensive third property in a city where NagaCorp already holds exclusive rights, calling it "too ambitious."
"The biggest problem by overspending will be putting overbearing pressure on operations to come up with sufficient revenues to meet the repayments," McCamley said.
"In a supercompetitive VIP market, which is where Naga will be looking to gain the required funds from, it's going to be very tough and ultimately could mean the property will be relying more on good luck than working within normal, budgeted, theoretical hold percentages."
Hold percentages refer to the amount of money a casino takes from those who play.
Such skepticism appeared to be reflected in NagaCorp share prices, which fell 20% after the initial announcement of the project on April 3, though it began recovering after details of the funding plan were revealed.
CIMB securities gaming analyst Michael Ting attributed the drop to a mix of anxiety about short-term returns and investors locking in profits after years of strong growth. He said the investment "should look relatively more reasonable" in the long term, but could take 15 years to break even in its earnings before interest, tax, depreciation and amortization.
In its latest filing, Naga said its Malaysian billionaire CEO Chen Lip Keong would fund 50% of development costs and the remainder would come from internally generated cash.
Chen will cover cost overruns and receive 1.14 billion settlement shares, issued at HK$12 per share, upon completion of the project by the company's long-term contractor, Chinese-owned CCAG Asia. This would increase Chen's stake in the company to 73.17% from the current 66.1%.
A deal to fund Naga 2, NagaCorp’s $700 million second casino-hotel which opened in 2017, also increased Chen’s stake in the company, a move that drew criticism for diluting the shares of minority shareholders.
In its filing, however, Naga claimed that "incremental earnings from the Naga 3 Project will be able to mitigate any dilutive effect."
Global Market Advisors senior partner Andrew Klebanow said the Naga CEO appeared confident enough in the company’s strategy to personally back the huge expansion.
“Dr. Chen is not averse to putting a lot of skin in the game and this funding plan is indicative of it,” he said.
The company was contacted for comment but did not respond as of publication time.
Funding is not the only issue under scrutiny, however. Though less sophisticated than NagaWorld, some analysts believe Sihanoukville's booming casino sector could also challenge the Phnom Penh giant in years to come, with tourists already drawn to the seaside destination and Macao-based junkets eager to set up there.
NagaCorp has recently seen strong growth in the VIP sector, with Macao's top three junket operators setting up operations at its NagaWorld complex. This helped drive earnings to record levels last year, with profit up 53% to $390.6 million as gross gaming revenue rose 55% to $1.4 billion. VIP "rollings," or the amount gambled, increased 69% to $35.7 billion.
But one major Macao junket operator has already set up on the coast.
"With Hoiana soon to open, and funded by the biggest junket group in Sun City, I think we all know where that group's priorities will be," McCamley said of the NagaWorld competitor in Sihanoukville. "And then to have to service a $3.5 billion debt, that's going to be tough."
With a floor area of about 550,000 sq. meters, Naga 3 would offer almost 5,000 hotel rooms in five towers -- two of them 66-stories tall -- and a 12-story "multi-entertainment" podium. It would add 800 gaming tables and 2,500 electronic gaming machines. Other features include an outlet mall, digital theme park and a zip line ride in the lobby.
Lorien Pilling, director at Global Betting and Gaming Consultants, said the plans are equal, in not bigger, in scale to developments in Las Vegas, Singapore and Europe, and it is unclear how Naga will differentiate itself. "Competition for the tourists' dollar is getting fiercer," he said.
Cambodia last year set an ambitious target of doubling tourist arrivals to 12 million by 2025, and it is investing in new airports to serve Phnom Penh and Siem Reap. Official figures show tourist arrivals up 11% to 6.2 million last year, including a 67% jump in Chinese tourists to 2 million.
While helping drive growth, the increase in tourists has also raised questions about the benefit for Cambodians, particularly in Sihanoukville, which now has a heavy Chinese presence.
"Regular Cambodian people, they get very little income on the incoming of the tourists from China," said Ho Vandy, secretary-general of the Cambodia's National Tourism Alliance.
"I wish to see all the benefits shared to the local people and the country."
Naga 3 has also drawn criticism from local activists for its location on the former site of the iconic White Building, a social housing complex built in the 1960s and demolished in 2017. Authorities had promised it would become a Japanese-built housing development, with floors set aside for evicted residents -- and then suddenly announced NagaCorp would assume control of the site.
The company's relatively meager tax contributions have also drawn criticism.
Despite the ballooning number of casinos -- 150 licenses were awarded by the end of last year, up from 98 in 2017 -- the government expected to collect just $56 million from the sector. NagaCorp reported paying $8.8 million last year, an effective 2% rate on profits.
However, Finance Ministry spokesman Ros Phearun said tax on casinos would soon be based on gross gaming revenue once a new casino law was passed later this year.
"I just can say that the GGR rate will be very competitive in the region," he said.