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I N I T I A T E C O V E R A G E
Tuesday, 1 November 2015
FBMKLCI: 1,672.16 MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 Sector: Gaming
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TA SecuritiesA Member of the TA Group
Luster Industries Berhad TP: RM0.12 (+41.2%)
The Millionaire Maker Last traded: RM0.085 THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY BUY
Tan Kam Meng, CFA
Tel: +603-2167 9605
[email protected]
www.taonline.com.my
EXECUTIVE SUMMUARY
� Under Bursa Malaysia’s CBRS program, we are initiating coverage on Luster
Industries Berhad (Luster) with a Buy recommendation. In our opinion,
investing in Luster is as good as buying a lottery, which could provide
enormous returns with minimum investment outlays.
� Luster is involved in manufacturing of plastic injection molding parts and
components and high precision plastic parts and components. In Aug-15, it
acquired 60% stake in Pan Cambodian Lottery Corporation Ltd (PCLCL) for
US$4.2mn and diversified into gaming industry.
� PCLCL is a Cambodian company, which is involved in digit number
forecasting business. Also, it has a full license to operate casinos and online
gaming in Kampot province, Cambodia.
� Black market activities in Cambodian lottery industry are rampant and
underground syndicates command a hefty 98% of market share. The
competition level is moderately high due to intensifying competition
between the legal and illegal lottery operators.
� Cambodian economy is expected to grow at CAGR 6.5% from 2014-2020.
The growing GDP is expected to produce higher per capita income, which
bodes well for the lottery industry.
� Cambodia lottery industry is conducive to operators as operations costs are
relatively small. Lottery companies are subject to only 10% gaming tax and
do not pay GST and corporate tax.
� PCLCL is currently applying for an increase in draw from current 3x a week
to 5x a week. The management is confident of obtaining the approval in end-
15 or early-16.
� In our opinion, the acquisition of PCLCL will be deemed as incomplete if
Luster do not make good use of its “free” casino and online gaming license
that were bundled into the deal.
� We believe casino development is in the pipeline as Luster has recently
elected Mr. Wong Ken Hong, a former senior executive of Genting Hong Kong,
as an executive director of Luster. Luster also placed out blocks of shares to
Sun City group.
� Luster can build casinos in Kampot province, which is close to Cambodia-
Vietnam border. It can be a profitable venture as there is a huge Vietnamese
target market and the casino requires limited capital expenditure.
Share Information
Bloomberg Code LSTI MK
Stock Code LUSTER (5068)
Lis ting Main Market
Share Cap (mn) 1731.9
Market Cap (RMmn) 147.2
Par Value (RM) 0.1
52-wk Hi /Lo (RM) 0.065/0.12
12-mth Avg Dai ly Vol ('000 shrs) 6473.7
Estimated Free Float (%) 72.6
Beta (x) 0.9
Major Shareholders (%)
Lim See Chea (10.7%)
Suncity Enterta inment (9.07%)
Wee Song He (7.6%)
Forecast Revision
FY15 FY16
- -
-3.3 3.4
Consensus - -
- -
Financial Indicators
FY15 FY16
Net Gearing (%) Net cash Net cash
FCF/share (sen) (0.8) 0.9
P/CFPS (x) nm 9.3
ROE (%) (2.1) 2.1
NTA/Share (RM) 0.1 0.1
Price/NTA (x) 1.2 1.1
Share Performance (%)
Price Change LUSTER FBM KLCI
1 mth 0.0 0.4
3 mth 21.4 3.9
6 mth 0.0 (4.1)
12 mth 0.0 (6.0)
Forecast Revis ion (%)
Net profi t (RMm)
TA's / Consensus (%)
Previous Rating Ini tiate coverage
(12-Mth) Share Price relative to the FBM KLCI
Source: Bloomberg
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1-Dec-15
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TA SecuritiesA Member of the TA Group
� Vietnamese citizens are not legally allowed to gamble inside Vietnam.
However, they will have no trouble finding casinos as Cambodia has built 32
casinos at different Cambodia-Vietnam borders.
� We opine that this is the right time to kick start the casino plan due to
increasing government’s efforts in promoting the gaming industry. The new
draft of the casino law will be stricter and more transparent to protect the
interest of casino operators.
� Those border warehouse casinos are targeting mainly the mass segment,
hence margins are expected to be higher than those resort-type casinos.
� Warehouse casinos are usually stand-alone casinos without hotel facilities.
This will also mean depreciation charges are capped to those casino
facilities, which are relatively small as compared to hotel development.
� Judging from Luster’s current cash level of RM23mn or US$5.5mn, it would
need to raise funds for working capital if the casino plan can take off the
ground.
� Based on the aggregate US$3mn profit guarantee from the vendor, we
project PCLCL’s profit to step up at least US$0.5mn per year from US$0.6mn
in FY15.
� We forecast FY16/17/18 earnings to be RM3.4mn/RM4.7mn/RM6.9mn
respectively based on following assumptions.
1. PCLCL to obtain approvals from the authorities to increase the number
of draw to 5x a week;
2. PCLCL to enhance its distribution network by adding 130-133 agents
per year in FY16-18;
3. Average sale per agent to increase to USD60-86/draw in FY16-18 due
to growing economy with higher GDP per capita and gain of market
share from black market syndicates; and
4. Luster’s manufacturing division to achieve stable earnings in the range
of RM0.04mn to RM0.9mn for FY16-18.
� Using a multi-stage discounted free cash flow model, we value Luster at
12.0sen, based on discount rate of 14% and terminal growth rate of 4%.
� Our valuation does not account for any contributions from Luster’s casino
license.
Earnings Summary (RM mn)
FYE Dec 2014 2015 2016F 2017F 2018F
Revenue 101.6 124.4 143.6 148.0 158.9
EBITDA 3.7 2.3 11.3 13.3 17.0
EBITDA margin (%) 3.7 1.8 7.9 9.0 10.7
Pretax profit 1.9 (3.4) 5.6 7.6 11.1
Adj PBT (2.1) (3.4) 5.6 7.6 11.1
Reported net profit 0.6 (3.3) 3.4 4.7 6.9
Core profit (3.5) (3.3) 3.4 4.7 6.9
Reported EPS (sen) 0.0 (0.2) 0.2 0.3 0.4
Core EPS (sen) (0.2) (0.2) 0.2 0.3 0.4
Core EPS growth (%) >-100 (24.3) >100 37.1 47.7
PER (x) nm nm 43.4 31.7 21.4
GDPS (sen) 0.0 0.0 0.0 0.0 0.0
Div yield (%) 0.0 0.0 0.0 0.0 0.0
Core ROE (%) (2.4) (2.1) 2.1 2.7 3.9
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1-Dec-15
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TA SecuritiesA Member of the TA Group
Background
Luster Industries Berhad (Luster) is principally involved in manufacturing of
plastic injection molding parts and components and high precision plastic parts
and components. Currently, it has 2 manufacturing plants located in Sungai
Petani and Melaka.
In Aug-15, the company completed the acquisition of 60% stake in Pan
Cambodian Lottery Corporation Ltd (PCLCL) for total cash consideration of
US$4.2mn. PCLCL is a Cambodian company, which is involved in digit number
forecasting business. Also, the company has a license to operate casinos and
online gaming in Kampot province, Cambodia.
To recap, Luster proposed to acquire 60% stake in PCLCL from the vendor, ie:
Opal Deluxe Ltd, and the deal is attached with profit guarantee of US$3mn
aggregate profit for 3 years ending Dec-2017. As a pledge against the profit
guarantee, Opal Deluxe Ltd has mortgaged its 35% stake in PCLCL to Luster as
security shares. In the event PCLCL fails to achieve the aggregate profit of
US$3mn by Dec-17, Luster shall be at liberty to enforce the mortgage on the
security shares up to the amount of profit shortfall. In the event the shortfall is
greater than the value of security shares, Opal Deluxe Ltd shall pay the difference
between the shortfall and the value of security shares in cash to Luster.
Major shareholders & management structure
Mr. Lim See Chea the founder of Luster, who owns up to 10.7% stake in the
company. Besides, Suncity Entertainment Ltd recently emerged as a major
shareholder of Luster after acquiring placement blocks of 9.07% of Luster’s new
shares. Coupled with 7.6% shares held by Wilson Wee, the free float of share in
Luster is estimated at 72.6%.
Mr. Lim is currently the group CEO and managing director, overseeing the
operation of plastic manufacturing. Mr. Lim has a wealth of knowledge and
experience in plastic manufacturing space, which can be traced back to 1979
when he joined Sonico Industries as a supervisor.
As far as lottery operation is concerned, Mr. Michael Ho is taking the helm of day-
to-day operations of PCLCL in Cambodia. Michael had come to Cambodia in 2007
and co-founded ISADORA Holdings And Investment Pty. Ltd, a lottery company
which sells scratch & win instant lottery tickets. He was the general manager of
the company and in-charge of the whole set up and operations, including the 13
digit game retail outlets in Phnom Penh, Cambodia to sell 4D, 3D and 2D lottery.
In Feb 2011, Michael set up PCLCL with a group of investors from Malaysia. He
is currently the CEO of the company and holder of the company’s digit game and
casino license issued by the Ministry of Economy and Finance, Cambodia.
US$3mn profit guarantee from PCLCL deal
No single controlling shareholder. Estimated free float is 72.7%
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TA SecuritiesA Member of the TA Group
Gaming Industry – Cambodia
Casino
The gaming industry has been growing at fast and steady pace since the award
of first casino license to Naga World in 1994. The increase in industry revenue,
thus shoring up government’s coffers via higher tax revenue, has boosted
government’s efforts in regulating the industry to attract foreign investments.
Regulating the industry. The gaming industry began when Cambodia regained
its independence in 1993 after the regimes of Democratic Kampuchea and
Vietnamese-controlled People’s Republic of Kampuchea, which gambling was
forbidden. However, illegal gambling was rampant until 1996 when the
Cambodian government introduced the Anti-gambling law where all gambling
activities were prohibited to the Cambodian citizens.
Through the laws, participants of illegal games will be imposed by a fine of 10-
50 thousand riels or imprisoned for a week or maximum for a month. Organisers
and agents will be fined up to 5-20mn riels and imprisonment for 1 to 15 years.
Since then, more than a dozen of licenses have been awarded to local and foreign
operators, which created a new revenue stream to the government and boosted
the country’s tourism industry.
The booming gaming industry has been incentivised by the competitive tax
structure in Cambodia, where the only taxation imposed on industry players
(casino and digit game) is the 10% gaming tax on gaming sales and activities.
This is relatively low as compared to regional countries, which are also exposed
to other forms of taxes like GST, VAT and corporate tax (see Table 1).
Table 1: Various taxes imposed on gaming companies
Country GST/VAT Gaming tax Corporate tax
Macau 0% 35+% 0%
Singapore (Premium) 7% 5% 17%
Singapore (Mass) 7% 15% 17%
Malaysia 6% 25% 25%
Vietnam 10% 30% 22%
South Korea 0% 20% 10-22%
Philippines 0% 30% 0%
Cambodia 0% 10% 0%
Table 1: Tax structure
In 2014, the Cambodian government received USD25mn tax revenue from the
gaming industry, representing a 4-year CAGR of 13.6% (see Chart 1). Although
the amount is still not significant as compared to total tax revenue (US$881.4mn
in 2013) and the country’s GDP (nominal GDP of US$16.7bn in 2014), the
thriving industry is important to the tourism sector as well as job creations.
Cambodian citizens are prohibited from all gambling activities
excluding lottery
Competitive tax structure in Cambodia
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TA SecuritiesA Member of the TA Group
Chart 1: Cambodia’s gaming tax revenue
Source: Ministry of Economy and Finance, Cambodia
Lottery
The market size of lottery business in Cambodia is reported at US$700mn to
US$1.0bn, based on independent research conducted by Proximity Market
Intelligence and Consulting Limited. This is significant as compared to the
country’s nominal GDP of US$16.7bn in 2014. However, the whooping industry
sales failed to generate much tax revenue to the Cambodian government as it is
believed 98% of the market volume is linked to underground syndicates. In our
back-of-the-envelope calculation, the black market activities have cost the
government an opportunity cost of not earning approximately US$69-98mn tax
revenue per year, using the existing gaming tax rate of 10%,
As at Jun-15, a total of 10 lottery licenses has been approved and granted by the
government as follows:
Table 2: 10 licensed lottery operators in Cambodia
Operators Games
Sport Social Affairs Lotto 6/45 and later 6/25
Naga Group Sweepstake and Instant Win
Diamond Entertainment Sweepstake
Philweb Instant Instant Win
CM6 Lottery 4D & Quick 5
Totalizator Agency Board 5D
Pan Cambodian Lottery Corporation 5D, 4D and 3+1D
Lucky Star Dragon Lottery Jun-39
VW Win Holding 6/36 and 5D
Khmer Pool Welfare Lottery Scratch & Win
Source: PCLCL
Although 10 licenses have been granted, there are only a number of lottery
companies continue their operations, while several of them have already
reduced their operations to smaller scale, changed their strategies or closed
down due to their inability to attract customers. For this reason, the
underground lottery continued dominating the market with giant market share.
15
20 21 21
25
28
32
36
42
0
5
10
15
20
25
30
35
40
45
2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f
US$'mn
Huge disparity in sales volume and government’s tax collections
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TA SecuritiesA Member of the TA Group
Table 3: Underground syndicates command giant market share
OperatorsMarket volume
(US$’000)Market share
Underground syndicates 2,200,000 98%
Lucky Star Dragon Lottery 15,000 1%
Camlotto 10,000 0%
Cambodian Mark 6 Co 10,000 0%
Pan Cambodian Lottery 6,000 0%
Industry Competition – Porter five forces
Chart 2: The level of competition is moderately high in the Cambodia
lottery industry
1. Entry barrier: Entry barriers are high for new players due to licensing
requirements. Furthermore, significant capex and opex are required
for start-up companies to gain meaningful market shares in the
industry.
2. Rivalry among players: As underground syndicates command the
giant market share in the industry, rivalry between the legal and illegal
operators is high as the former strives to gain market share with the
help from the authority in clamping down black market activities.
However, illegal betting is still rampant due to higher prize payout.
3. Bargaining power of buyer: In digit games, punters usually try to
wager all lottery games possible to avoid the opportunity cost, which
can be enormous if their favourite numbers come out as first prize. As
such, we think the bargaining power is low.
4. Bargaining power of supplier: In this case, the government is deemed
as an appropriate supplier as it issues the gaming licenses to lottery
players. The bargaining power of government is high as it can also
revoke any gaming licenses.
5. Threat of substitute: Given the unique features of lottery, i.e.:
minimum bet of 1,000 riels and possible prize payout of 30,000 riels,
we do not see any close substitute for lottery product.
Entry barriers: High
Rivalry
threat: High
Substitute threat: Low
Customer
bargining
power: Low
Supplier
bargaining
power:
High
Underground syndicates control 98% of market share
The level of competition is moderately high
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TA SecuritiesA Member of the TA Group
INVESTMENT CASE
1) Digit game – a new lease of life
We believe PCLCL can give a new lease of life to Luster, which is in dire need of
solutions to sustainable future earnings growth. Recall, Luster was uplifted from
PN17 status in Mar-13 after acquisitions of Exzone Plastic Manufacturers Sdn
Bhd, Winco Precision Engineering Sdn Bhd and Winco Precision Technologies
Sdn Bhd as well as a series of capital restructuring program. However, the
company’s profit showed no signs of improvement with 2014 and 9M15 core
earnings slipped into losses of RM3.5mn and RM4.4mn respectively.
Nevertheless, the company still possessed healthy net cash of RM23mn as at Sep-
15.
In our opinion, PCLCL is the right candidate in filling the missing piece in Luster,
i.e.: sustainable earnings growth and stable cash flow. Although this acquisition
is nothing alike any other horizontal or vertical deals, we do not see this as a
significant problem as Luster has recruited an ex-staff of Genting Hong Kong, Mr.
Wong Ken Hong, as an executive director of Luster in overseeing its operations
in Cambodia. Importantly, PCLCL can offer various growth drivers to support
future earnings.
i. Cambodian economy is slated to grow at 2014-2020 CAGR of 6.5%;
ii. Friendlier environment; and
iii. Crackdown of illegal lottery operation.
i. Cambodian economy is slated to grow at 2014-2020 CAGR of
6.5%.
Cambodia is located on the south-eastern part of Asia, bordering Laos to the
north-east, Vietnam to the south-east and Thailand to the west and north-
west. It has a population of approximately 15.5mn and is the 69th most
populous country in the world. The economy is heavily dependent on 4
sectors including, garments and textiles, tourism, construction and
agriculture.
Cambodian joined ASEAN in 1999 and WTO in 2004 and has experienced an
economic boom over the last fifteen years with average annual growth of
11.1%. The moderation in growth in 2009 was due to global financial crisis.
In terms of land transactions, full ownership is restricted to Cambodians but
Cambodia’s lease law allows a maximum 99-year lease to foreigners.
Chart 3: Cambodia’s GDP growth
Source: National Institute of Statistics, Cambodia
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
US$'bn
Nominal GDP Growth
No signs of earnings improvement after lifted from PN17
Luster recruited ex-staff of Genting Hong Kong for business know-how
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TA SecuritiesA Member of the TA Group
In our recent visit to Cambodia, we observed massive on-going construction
activities in the city of Phnom Penh, be it building jobs or infrastructure
development. Moreover, tourist hotspots were crowded with foreign
tourists and Naga World was never lack of foreign gamblers in the wee
hours. According to official data, tourist arrivals has been growing at
double digit since 2010 (except 2014) (see Chart 4) and generating lucrative
tourism spending (see Chart 5) and job opportunity for the economy. Note
that Vietnamese tourists are the biggest groups of foreign tourists in
Cambodia of estimated 20% and they are commonly found in casinos near
Cambodia-Vietnam borders.
Chart 4: Steady growth in tourist arrivals in Cambodia Chart 5: Rising tourism receipts
Source: Ministry of Tourism, Cambodia
All in, Cambodia’s economy has reached US$16.7bn GDP in 2014 and is
forecasted to grow to US$24.5bn by 2020, representing a CAGR growth of
6.5%. The growing GDP is expected to translate into higher capita income
from US$1,103.4 in 2014 to US$1,637 in 2020. This represents a huge
opportunity to lottery operators as industry sales volume is expected to
grow further, in tandem with growing capita income.
ii. Friendlier environment
Cambodia lottery industry is conducive to operators as costs of operations
are relatively small as compared to regional countries. Lottery companies
are subject to 10% gaming tax on lottery sales on top of US$10,000 annual
license fee and US$250 annual fee for each operating outlets. Agent’s
commission is typically charged in the range from 8% to 15% depending on
the amount of lottery sales. Meanwhile, the prize payout is usually at 50%
of lottery sales.
For comparison purpose, the three number forecast operators (NFOs) in
Malaysia (BJToto, Magnum and Damacai) currently pay 6% GST, 8% gaming
tax, 8% pool betting duty and 25% corporate tax. The average agent’s
commission is low at 5% of sales as the industry has already established the
economies of scale. Currently, we estimate NFOs to maintain an average
60% prize payout.
PCLCL currently has 15 outlets, 400 agents and counting in Phnom Penh. To
achieve the economies of scale, the company will continue to invite qualified
agents to participate in the outlet scheme in selected locations with rental
subsidies. Also, PCLCL has launched mobile ticketing system where the
company is in talks with multiple 3rd parties to install point-of-sales terminal
at their outlets, including those three-wheel motorized vehicles tuk-tuk (see
Chart 6).
0%
5%
10%
15%
20%
25%
30%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2006 2007 2008 2009 2010 2011 2012 2013 2014
mn
Tourist arrivals Growth
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
500
1000
1500
2000
2500
3000
2006 2007 2008 2009 2010 2011 2012 2013 2014
US$mnTourism receipts Growth
Rising industry sales underpinned by country’s economic growth
Cambodian lottery players pay lesser taxes
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TA SecuritiesA Member of the TA Group
Chart 6: Tuk Tuk will be employed for lottery sales Chart 7: high-tech handheld device
Source: PCLCL
Each unit will be installed with a state-of-the-art handheld financial
terminal, utilizing GPRS technology and equipped with dual-GPRS SIM cards.
They are heavily protected with security measures and access control will
require authentication of username and password. Each terminal is
provided with security paper stock for printing bet receipts (see Chart 7).
The idea of mobile sales team can be a viable marketing tool to enhance the
company’s sales network without incurring much fixed costs. Having said
that, we expect overwhelming response from tuk tuk drivers, who can bring
home extra side income. In our model, we expect PCLCL to expand its
network by adding 130-133 new agents each year from 2016 to 2018.
The increase in distribution network is important to capture market share
and create product awareness. To increase sales further, PCLCL is in the
midst of applying for two additional draws per week. Currently, PCLCL
offers digit games including 5D, 4D and 3+1D on 3 draws per week basis (ie:
Monday, Wednesday and Friday). The minimum bet is 1,000 riels (c.
US$0.25) and punters can play the game by picking the corresponding
number of digits under different categories.
Chart 8: PCLCL’s digit games and prize payout
How to Play:
5D : Pick 5-digits (5D) number, e.g. 12345.
4D : Pick 4-digits (4D) number, e.g. 1368
1+3D : Pick 1+3-digits (3D) number, e.g. 2+ 658
Mobile ticketing system to reduce
fixed costs
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TA SecuritiesA Member of the TA Group
US$ Riel
1st prize 7,500.0 30,000.0
2nd prize 2,500.0 10,000.0
3rd prize 1,250.0 5,000.0
Consolation prize (5x) 250.0 1,000.0
Subtotal 12,500.0
1st prize 750.0 3,000.0
2nd prize 250.0 1,000.0
3rd prize 125.0 500.0
Consolation prize (5x) 25.0 100.0
Subtotal 1,250.0
1st prize 162.5 650.0
Special bonus prize 137.5 550.0
Subtotal 300.0
Total per draw 14,050.00
Prize payout structure based on minimum bet of 1,000 Riels (c. US$0.25)
5D
4D
1+
3D
Payout
Source: PCLCL
According to management, the company has applied with relevant
authorities to increase the number of draw to 5 times a week. In Malaysia’s
context, this may sound impractical but it is absolutely workable in
Cambodia. Back in 1999, Sachivakam Lottery, Mohasambath and Phnom
Pich used to conduct 3 draws per days, or 21 draws per week. In our
forecast, we assume the number of draw per week to increase to 5x from
2016 onwards.
iii. Crackdown of illegal operation
Cambodians love lottery games as this could be the only entertainment
available to them, who are earning average daily wage of US$5. The
affordability of lottery with a minimum bet of 1,000 riels (US$0.25) for
possible winning of 30,000 riels (US$7,500) makes it highly irresistible to
the locals for pursuing their golden dreams.
However, black market activities are rampant in the Cambodian lottery
industry mainly due to higher prize payout ratio. In addition, it is believed
the sale network is far bigger than the legal lottery in Cambodia. Based on
an independent research report, the total lottery industry worth US$700mn
to US$1bn and it is 98% controlled by black market syndicates. This has
potentially reduced the government’s tax revenue of estimated USD69mn to
RM98mn, which can be used for the betterment of society.
With all these worrying statistics, we believe the government would
continue its efforts in clamping down illegal lottery. Although a full
crackdown on black market is almost impossible in the near term, we believe
the level of dominance it has in the industry would reduce gradually and this
means the legal lottery would be able to regain its market share.
2) Casino – the actual growth driver
We reiterate that Luster has spent US$4.2mn to acquire a lottery business (for
60%) in Cambodia with an aggregate profit of US$3mn guaranteed for period
2015-2017. If we conservatively assume that future profit to be US$1mn per
year using the profit guarantee as a guide, the payback period for the investment
in PCLCL is 7 years. This appears to be a fair deal (BJToto’s EV/EVBITDA is also
at 7x) but we consider the deal incomplete if Luster not making good use of its
“free” casino and online gaming license, which bundled in PCLCL acquisition deal.
Applying for 5 draws per week to boost sales
Cracking down on illegal betting means legal lottery would regain
market share
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1-Dec-15
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TA SecuritiesA Member of the TA Group
Here, we make a bold assumption that Luster will eventually start its new casino
development in Cambodia, premised on 2 findings below:
a. Luster has recently elected Mr. Wong Ken Hong, a former senior
executive of Genting Hong Kong, as an executive director of Luster; and
b. Luster has recently placed out 2 blocks of new shares (9.07%) to Suncity
Entertainment Ltd. According to management, Suncity Entertainment
is a unit of Sun City Group, which is one of the biggest junket operators
in Macau. Note that Sun City group has several VIP clubs in major
casinos in Macau, Korea and the Philippines.
Currently, there are 57 casinos operating in Cambodia, of which 18 are located at
the Cambodia-Thai border, 29 at Cambodia-Vietnam border, 8 in Sihanoukville,
1 at Bokor Mountain and 1 in Phnom Penh. Two largest casino hubs in Cambodia
are Sihanoukville and Poipet while Kampot represents another viable location
for gaming. Kampot is located south of Cambodia and approximately 3 hours
from Phnom Penh. Sihanoukville meanwhile is located in south west of
Cambodia and is approximately 3 hours from Phnom Penh. Poipet meanwhile is
a Cambodian town located within the Banteay Meachay province and the north
west crossing of the Cambodian and Thailand border (see Chart 9).
Chart 9: Major locations of casinos in Cambodia
Source: PCLCL
Luster, through PCLCL, can build casinos in Kampot province, which is close to
Cambodia-Vietnam border. With Vietnamese being the largest group of tourists
in Cambodia, accounting for 20%, Kampot will serve as a one of the prime
locations for casino development.
In our opinion, we believe casino business can be a profitable venture due to
following reasons.
1. Huge target market in Kampot province;
2. Relatively small investment amount.
1. Huge target market in Kampot province
Vietnamese citizens are not legally allowed to gamble inside Vietnam and
the existing 6 land-based casinos in Vietnam are for foreigners only.
However, for those living near Cambodia border, they will have no troubles
finding casinos as Cambodia has built 32 casinos at the borders with the
famous being the Bavet checkpoint, one hour drive from Ho Chi Minh City,
where about a dozen of casinos located.
Casino development could be in the pipeline
Luster, via PCLCL can build casinos in Kampot province
Vietnamese citizens travel to border casinos to gamble
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TA SecuritiesA Member of the TA Group
Table games and slot machines are prevalent inside the casinos and the
currencies accepted are US Dollar, Cambodian Riel and Vietnamese Dong.
However, gamblers shall not be surprised in seeing other games like Dragon
Tiger, Xoc Dia, FanTan or even cock fighting. Meanwhile, online gaming is
also prevalent in Cambodian casinos for those, who are not legally to play
inside the casinos. Note that PCLCL obtained a casino license issued by
Ministry of Economy and Finance. This is a full blanket license which covers
all sorts of table games, animal games, slot machine and online gaming.
Since the grant of first casino license to Naga World in 1994, investments in
casino business have never been so flourishing until recent years, when all
record deals in the casino space were made. In July-15, Donaco International
has completed its acquisition of Star Vegas Resort and Club in Poipet for
US$360mn, the most expensive casino deal in Cambodia. In 2008, Queenco
Leisure International close a US$10mn land purchase deal in Cambodia for
casino resort development in Sihanoukville. All the bullish sentiments are
supported by government’s efforts in promoting the gaming industry.
According to the spokesman for the Ministry of Economy and Finance, the
new draft of the casino law will be stricter and more transparent to protect
the interest of casino operators including the seizure of illegal operations.
As such, we believe this may be the right time for the group to commence its
casino development in Cambodia, when much of the industry hurdlers and
threats would be eliminated under the new gaming law.
2. Small investment outlay
Can border casinos generate good returns in the future? We believe so after
studying the gambler profiles and cost structure. Note that most of the
border casinos cater for the mass market, where most of them are day-
trippers. These group of players usually generate higher margins or win
rates to casino as compared to VIPs as the level of services and marketing
expenses tailored to these players are lower. In other words, border casinos
can have huge savings on fancy entertainments, luxury accommodation and
transportation services and commissions for junket services as compared to
those resort-type casinos.
Also, capital expenditure is limited as most of the border casinos are stand-
alone warehouse-type casinos without hotel facilities. This will also mean
that depreciation charges are only capped to those casino facilities, which
are relatively small as compared to hotel development. As such, we believe
Luster can have a fast cash turnaround and short investment payback period
if it starts building a warehouse casino in the border of Cambodia-Vietnam.
Judging from Luster’s current cash level of RM23mn or US$5.5mn, it should
be able to fund the initial stage of construction if the casino plan can take off
the ground. However, for working capital, we believe the company and Opal
Deluxe would need to pump in more money into PCLCL to commence casino
operations.
The bullish sentiment started with Donaco’s US$360mn acquisition deal
Limited cost requirement to build border casinos
Casino plan may require additional funding
Page 13
1-Dec-15
Page 13 of 15
TA SecuritiesA Member of the TA Group
HISTORICAL EARNINGS PERFORMANCE & FORECAST
Historical performance
Luster was lifted from PN17 in 2013 after capital restructuring and several
acquisitions exercises. As part of the regularisation plan, those new shares
issuance pursuant to debt settlement, rights issue, placement, and acquisitions
were all fixed at par of RM0.10/share. Thereafter, the company recorded net
profit of RM3.1mn (core profit: RM3.5mn) and RM0.6mn (core loss: RM3.5mn)
for FY13 and FY14 respectively. For 9M15, it posted a net loss of RM3.5mn (core
loss: RM4.4mn). The cumulative net profit of RM0.1mn over the past 33 months
(since lifted from PN17) has not changed Luster’s new capital structure in a big
way with net asset per share stood at 9.0sen. However, its share price has
dropped significantly from the 10sen par value to the current level of 8.5sen.
Luster suffered 8 consecutive years of loss since 2005 and turned around in FY13
(at core profit level). During these periods, it lost its competitiveness when
material costs (resin) were lifted by high oil price and sales affected by the global
economic turmoil in 2008. However, the completion of regularization exercise
has helped to revamped the capital structure and improve earnings in FY13.
Nevertheless, the earnings recovery was just a flash in a pan as the
implementation of minimum wage in Malaysia in 2014 dented operating margin
and caused FY14 and 9M15 earnings to slip back to losses again (see Chart 10).
Chart 10: Historical earnings performance
Forecast
Based on the aggregate US$3mn profit guarantee from the vendor, we project
PCLCL’s profit to step up US$0.5mn per year from US$0.6mn in FY15. As the
acquisition of PCLCL was completed in Aug-15, we take into account only 4-
month contribution from PCLCL, which is RM0.47mn (at USDMYR: 3.90) for its
60% stake. Combining this with Luster’s estimated core loss of RM3.7mn, we
project the group to chalk up a loss of RM3.3mn for FY15.
-100
-50
0
50
100
150
200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 6M15
RM'mn
Revenue Core profit
Turnaround &
lifted from PN17
Oil surged to
US$100/b
Financial turmoil &
Luster was
classified as PN17
company
Imp. of
minimum
wage policy
High resin cost and minimum wage policy dragged historical
earnings performance
Page 14
1-Dec-15
Page 14 of 15
TA SecuritiesA Member of the TA Group
Looking forward, we forecast FY16/17/18 earnings to be
RM3.4mn/RM4.7mn/RM6.9mn respectively based on following assumptions.
1. PCLCL to obtain approvals from the authorities to increase the draw to
5x a week;
2. PCLCL to enhance its distribution network by adding 130-133 agents
per year in FY16-18;
3. Average sale per agent to increase to USD60-86/draw for FY16-18 due
to growing economy with higher GDP per capita and gain of market
share from underground syndicates; and
4. Luster’s manufacturing division to achieve stable earnings in the range
of RM0.04mn to RM0.9mn for FY16-18.
VALUATION & RECOMMENDATION
As future earnings are expected to grow exponentially, we use multi-stage
discounted free cash flow model in valuing the stock.
i. Stage 1 – negative free cash flow in FY15 due to acquisition of
PCLCL, then grow at 25-31% during 2016-2020;
ii. Stage 2 – 10% growth during 2021-2025 when PCLCL acquires
more market share via expansion in distribution network; and
iii. Final stage – terminal growth of 4% from 2026 onwards as growth
is expected to revert to the mean (see Table 4).
Using a discount rate of 14%, we derive a target price of 12.0sen/share for
Luster. This implies FY16-18 PE multiples of 30x-64x, which we think is fair in
lights of strong earnings growth momentum. Moreover, the casino and online
gaming license that Luster possesses now could possibly revamp the group’s
earnings base and result in stronger earnings growth in the future.
Table 4: Luster’s multi-stage valuation model
Discount rate 14%
Terminal growth 4%
NPV (RM'mn) 207.0
Outstanding share (mn) 1731.9
NPV/share (sen) 12.0
Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Free cash flow (RM'mn) 15.8 9.8 12.1 15.4 19.7 22.7 26.1 30.0 34.5 39.7 41.6 43.7 45.9 48.2 50.6
Terminal value (RM'mn) 506.2
Discount factor 0.9 0.8 0.7 0.6 0.5 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.1
NPV (RM'mn) 13.8 7.5 8.1 9.0 10.1 10.1 10.2 10.2 10.3 10.3 9.5 8.7 8.0 7.3 74.0
1st growth phase
Exponential growth 10% growth
2nd growth phase 3rd terminal growth phase
4% growth
Page 15
1-Dec-15
Page 15 of 15
TA SecuritiesA Member of the TA Group
Profit and Loss (RM'mn) Balance Sheet (RM'mn)
FYE Dec 2014 2015 2016F 2017F 2018F FYE Dec 2014 2015 2016F 2017F 2018F
Revenue 101.6 124.4 143.6 148.0 158.9 PPE 75.0 71.2 68.8 66.3 63.7
COGS (91.2) (114.8) (120.4) (125.6) (132.5) Goodwill 20.7 35.7 35.7 35.7 35.7
Gross profit 10.3 9.6 23.2 22.4 26.4 LT Assets 95.7 107.0 104.5 102.0 99.4
EBITDA 3.7 2.3 11.3 13.3 17.0 Inventories 13.2 13.4 21.6 22.3 23.9
Depr. & Amor. (5.6) (5.4) (5.5) (5.5) (5.6) Trade & other receivables 30.1 31.1 18.9 18.8 19.4
Operating expenses (6.6) (12.9) (17.5) (14.8) (15.2) Cash & Cash equivalent 29.1 35.8 51.5 61.3 73.3
EI 3.9 0.0 0.0 0.0 0.0 Others 0.8 0.8 0.8 0.8 0.8
PBT 1.7 (3.4) 5.6 7.6 11.1 ST Assets 73.2 81.1 92.8 103.1 117.5
Adj PBT (2.1) (3.4) 5.6 7.6 11.1
Tax (1.0) 0.4 (0.0) (0.2) (0.3) Total Assets 168.9 188.0 197.3 205.1 216.9
MI (0.2) (0.3) (2.2) (2.8) (4.0)
Net profit 0.6 (3.3) 3.4 4.7 6.9 Trade and other payables 12.1 13.7 17.3 17.7 18.6
Core profit (3.5) (3.3) 3.4 4.7 6.9 ST Borrowings 2.8 7.4 7.4 7.4 7.4
EPS (sen) (0.2) (0.2) 0.2 0.3 0.4 Others 0.3 0.3 0.3 0.3 0.3
DPS (sen) 0.0 0.0 0.0 0.0 0.0 ST Liabilities 15.2 21.3 25.0 25.3 26.2
Cash Flow (RM'mn) LT Borrowings 1.5 1.5 1.5 1.5 1.5
FYE Dec 2014 2015 2016F 2017F 2018F Others 1.5 1.5 1.5 1.5 1.5
PBT 1.7 (3.4) 5.6 7.6 11.1 LT Liabilities 3.0 3.0 3.0 3.0 3.0
Non- cash item 5.6 5.4 5.5 5.5 5.6
Chg in working capital (1.8) 0.4 7.7 (0.2) (1.4) Share Cap 157.4 173.2 173.2 173.2 173.2
Tax (1.9) 0.4 (0.0) (0.2) (0.3) Reserves (6.7) (9.7) (6.4) (1.7) 5.2
Others (3.4) 0.0 0.0 (0.0) (0.0) Shareholder's Funds 150.8 163.4 166.8 171.5 178.4
CFO 0.1 2.8 18.8 12.8 15.1 MI 0.0 0.3 2.5 5.3 9.3
Capex (8.2) (1.7) (3.0) (3.0) (3.0) Liabilities + Equities 168.9 188.0 197.3 205.1 216.9
Others (0.6) (15.0) 0.0 0.0 0.0
CFI (8.8) (16.7) (3.0) (3.0) (3.0) Ratios 2014 2015 2016F 2017F 2018F
EPS Growth (%) >-100 >100 >100 37.1 47.7
Net Borrowing/Rpmt (0.2) 4.5 0.0 0.0 0.0 PER (x) nm nm 43.4 31.7 21.4
Issue of share 0.0 16.0 0.0 0.0 0.0 Div Yield (%) 0.0 0.0 0.0 0.0 0.0
Others 0.4 0.0 0.0 0.0 0.0 Net cash (RMm) 24.7 26.8 42.6 52.3 64.4
CFF 0.2 20.5 0.0 0.0 0.0 Net gearing (x) Net cash Net cash Net cash Net cash Net cash
ROE (%) (2.4) (2.1) 2.1 2.7 3.9
Key Assumptions (RM'mn) 2014 2015 2016F 2017F 2018F ROA (%) (2.0) (1.8) 1.8 2.3 3.3
no. of draw - 169 260 260 260 NA per share (RM) 9.6 9.4 9.6 9.9 10.3
no. of agent - 400 530 663 795 NTA/share (RM) 0.08 0.07 0.08 0.08 0.08
Sales per agent per draw (US$) - 50 60 72 86 P/NTA (x) 1.0 1.2 1.1 1.1 1.0
US$MYR - 3.90 4.30 4.10 4.00 EV/EBITDA (x) 29.7 52.6 9.2 7.1 4.9
Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any
direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.
This report has been prepared by TA SECURITIES HOLDINGSBERHAD for purposes of CMDF-Bursa Research Scheme ("CBRS") administered by Bursa Malaysia Berhad and will be compensated to undertake the scheme. TA SECURITIES HOLDINGSBERHAD has produced this report independent of any influence from the CBRS or the subject
company. For more information about CBRS and other research reports, please visit Bursa Malaysia’s website at:
http://www.bursamalaysia.com/website/bm/listed_companies/cmdf_bursa_research_scheme/eResearch.jsp
forTA SECURITIES HOLDINGSBERHAD(14948-M)
(A Participating Organisation of Bursa Malaysia Securities Berhad)
KaladherGovindan – Head of Research
