The successful acquisition of a 25% stake in a Russian casino once again proves its executive ability and expects coordinated growth in performance.
Sun City announced on April 23, 2019 that it bought 24.68 per cent of 102.HK, which operates a casino in Vladivostok, Russia, for HK $718 million, a premium of 31 per cent to the HK $1.48 that Kesheng closed on April 23. Coupled with the fact that the company already holds 3.29% of Kaisheng's shares, Sun City currently holds about 27.97% of Kaisheng Holdings. After the acquisition, Sun City is currently a single major shareholder of Kaisheng Holdings, but the company said in the announcement that it will not merge Kaisheng Holdings into the financial statements for the time being. In our past reports, we have repeatedly stressed that the company is optimistic about and actively layout the Russian gaming business. This acquisition once again proves the good executive ability of the management of the company. After the acquisition, the company is expected to divert its rich VIP customer resources to the Vladivostok casino, bringing more room for performance increment. At the same time, it can also produce a synergistic effect for the layout of Sun City in the Asia-Pacific region, enriching tourism and gambling products and expanding market share.
South Korean projects are progressing steadily, and projects in Vietnam and Cambodia are expected to contribute performance from the end of 19 to the beginning of 20, and are expected to become Asia-Pacific gaming giants in the future.
With the exception of Russia, the company's gaming and entertainment business in the Asia-Pacific region is progressing smoothly and the Korean project is progressing steadily: on February 21, 2019, a wholly owned subsidiary of Sun City signed a memorandum of understanding with South Korea-listed casino operator Paradise to reach a possible cooperation with Paradise Casino Busan, a licensed casino owned by Paradise in Busan. In addition, we believe that Vietnam Huian, Cambodia West Port project will begin to contribute to the performance from the end of 19 to 2020. In the future, with the gradual divestiture of the company's real estate business, Sun City will become a more pure gaming target and is expected to become one of the Asia-Pacific gaming and entertainment giants.
The first phase of Huian Resort in Vietnam is expected to open on Q4 this year, and the company has a 34% stake. It is expected to have 140 casinos, 1000 slot machines, 18 holes of golf courses and 1000 hotel rooms. The company has a dual pipeline, which can take a commission on EBITDA and receive a share of gaming revenue and profit from the management agreement. After the opening of the casino, the main customer groups are Chinese and Korean. According to the business growth space brought to the gold industry by the Sun City Casino after its opening in March last year, we believe that Sun City will effectively enhance its business in Vietnam with its brand advantage in high-end gambling. (note: high-end gambling intermediary business is not in the body of listed companies). Although Vietnamese law has just begun to allow Vietnamese to gamble locally, Sun City Huian Casino has not been included as a pilot project at the beginning of its opening. Another Vietnamese casino, Fuguo Island in the south (whose shareholders are large Vietnamese real estate developers) has been included as a pilot, and we believe that the Phnom Penh casino in Cambodia may be diverted to some extent.
Long-term optimistic that the company is expected to replicate the success of the gold industry and move towards the goal of becoming an Asia-Pacific gaming giant, TP raised to HK $3.30 and reiterated its "buy" rating.
With the deepening of the layout of Sun City in Russia, we expect Sun City to further increase its stake in Kaisheng to 51% absolute holding in the future, and generate consolidated income in 2020. In addition, the management consulting services of Huian Resort in Vietnam and Xigang Resort in Cambodia are also expected to begin with the casino ramp up. Combined with the company's existing tourism and property income, we estimate that Sun City revenue will reach 2.29 billion yuan in 2020, corresponding to EBITDA is expected to reach 1.6 billion yuan. We use SOTP distribution valuation: in Vietnam, compared with Macau's current industry EV/EBITDA valuation of about 14x and the gold sector's 10xEV/EBITDA valuation, we give a mid-level EV/EBITDA valuation of 12x in 2020; for Vladivostok, we give a 10xEV/EBITDA valuation similar to that of gold. For the resort management consultancy service, we give the company management consultancy service an EV/EBITDA valuation of 15x in 2020 compared to the general 15x-30x valuation of international and Southeast Asian hotel management companies. In addition, we value the company's travel-related services at 3.0x EV/Sales in 2020, compared with Cheng Yilong's 3.0x and Trip.com 3.8x in 2020.
In the long run, the company operates gaming in the Asia-Pacific region with a lighter asset model, which serves as a medium-and long-term catalyst for the company, which is expected to replicate the success of the gold world and move towards the goal of becoming an Asia-Pacific gaming giant. We raised Sun City TP from HK $1.80 to HK $3.30, reiterating our "buy" rating.
Risk tips: competition in Southeast Asian gaming market, issuance of gambling cards in Vietnam, etc.