Company overview - Donaco International Limited is engaged in operating leisure and entertainment businesses across the Asia Pacific region. The Company's segments are Casino operations-Vietnam, Casino operations-Cambodia and Corporate operations. Its Casino operations-Vietnam segment consists of the Aristo International Hotel operating in Vietnam, hotel accommodation, and gaming and leisure facilities. Its Casino operations-Cambodia segment consists of the Star Vegas Resort and Club operating in Cambodia, hotel accommodation, and gaming and leisure facilities. Its Corporate operations segment consists of the development and implementation of corporate strategy, commercial negotiations, corporate finance, treasury, management accounting, corporate governance and investor relations functions. The Star Vegas Resort and Club has over 100 gaming tables, more than 1,400 slot machines, and 385 hotel rooms. The Aristo International Hotel has approximately 400 hotel rooms.
 

 
DNA Details
Change of Parent Company Auditor: Donaco International Ltd (ASX: DNA) has appointed Crowe Horwath Sydney, the fifth largest accountancy firm in Australia, as the company’s auditor. Crowe Horwath already provides the audit services for the DNA’s key operating subsidiaries, being Donaco Hong Kong Limited and DNA Star Vegas Co., Limited. Crowe Horwath has been the auditor for those entities since their inception. Further, the previous auditor, William Buck, has confirmed to ASIC that there are no disagreements between them and the directors or management of DNA.
 
DNA Star Vegas acquisition led to a seven-fold increase in group revenues in FY16: DNA had successfully integrated the newly acquired DNA Star Vegas in Poipet, situated on the Thailand and Cambodian border in FY 16. This acquisition has resulted in a seven-fold increase in the group revenues. Further, in FY 16 there has been improvement in the performance of the Aristo International Hotel, in Lao Cai in Vietnam, due to the strong growth in both gaming and non-gaming revenue. Accordingly, DNA has reported the group revenue of A$143.4 million in FY 16 up from A$20.4 million in prior corresponding period. This includes revenue from Star Vegas of A$120.1 million and the Aristo’s revenue of A$23.2 million, which has grown 36% as compared to FY 15. DNA has posted the reported NPAT of A$77.2 million in FY 16, as compared to a loss of A$2.9 million in FY15. The NPAT includes the valuation uplift of A$55.2 million for Star Vegas, A$20.5 million management fee payable to the venue manager due to the strong performance of Star Vegas and A$11.8 million of non-recurring M&A costs for acquisition of Star Vegas. Moreover, DNA also posted strong operational results in FY 16 as the group EBITDA grew to A$87.6 million (before non-recurring items) from A$0.6 million in FY 15. Therefore, the adjusted group EBITDA is of A$97 million, exceeding the guidance of A$90-95 million in which Star Vegas has posted 21% increase in EBITDA in local currency terms to Thai Baht 2.2 billion and Aristo has posted a 62% increase in EBITDA in local currency terms to RMB 51 million. The Star Vegas EBITDA in FY 16 is of USD 63.3 million exceeding the target of USD 60 million. Additionally, the corporate costs as a percentage of revenue have been expected to decline as the business scales up.
 

FY 16 Financial Performance (Source: Company Reports)
 
Further growth at DNA Star Vegas: Star Vegas acquisition has transformed the scale of DNA’s operations. Star Vegas is the most luxurious Poipet casino hotel consisting of 385 guest rooms, Sports Bar with wagering license (sports and racing), multiple restaurants, shops, health spa, pool and growing non-gaming revenues. Further, there are substantial casino facilities consisting of 139 gaming tables, predominantly baccarat, 1,566 Electronic Gaming Machines (EGMs), of which 288 are owned outright and 1,278 are under profit share deals. Moreover, DNA is positive about the growth of DNA Star Vegas through leveraging the Manchester United relationship, VIP promotions and the recent expansion into the neighboring Star Paradise property. Additionally, Star Vegas business also owns an online gaming license that is yet to be utilized and the company is currently exploring the alternatives for the utilization of this license and expects to make some progress during FY17.
 

Star Vegas Performance in FY 16 (Source: Company Reports)
 
Star Vegas - Star Paradise deal: DNA has successfully finished the deal to expand the Star Vegas gaming business into the adjoining Star Paradise property, and has started managing the gaming floor for a monthly fee from the start of September. After the deal, there is an additional capacity to allow for new Thai junkets and new players. In addition to the monthly fee, DNA would get the reimbursement of the operating costs incurred by Star Vegas for the venue. All costs and risks related with the venue development will be borne by DNA’s Thai partner and DNA requires no capital expenditure in this deal. Moreover, DNA is finalizing an exclusive option to acquire the entire Star Paradise business. Any acquisition proposal of DNA is subject to all applicable legal requirements, including the shareholder approval. The expansion of Star Vegas into Star Paradise is an important strategic move for DNA that will solidify the market-leading position in the Poipet region. Further, the additional earnings for managing Star Paradise is expected to complement DNA’s core earnings from Star Vegas.
 
Reduction in Debt: DNA is reducing its debt and net debt to equity is only 15% in FY 16. Moreover, DNA is focused on paying down the remainder of the acquisition financing as a priority and is expected to pay all the debt in 12-18 months. DNA had renegotiated and refinanced the debt facility in July on more attractive terms that will further reduce the financing costs over the next 2 years. Meanwhile, DNA has refinanced the USD 20 million working capital facility in July 2016, which will reduce the financing costs over FY17 and FY18. Meanwhile, the grouphas purchased $1m worth of shares on market for the newly established long-term incentive scheme. DNA has declared and paid a maiden dividend of 1 cent per share in FY 16. On the other side, DNA is widely recognized by governments and the customers as the company that operates with high standards of probity and governance. DNA believes that strong corporate governance principles provide the company with a competitive advantage in pursuing further growth opportunities as they arise.
 
First four months of FY 17 performance highlights: DNA experienced the mixed start in the first four months to the end of October 2016. The Aristo had a very strong start due to the high growth in visitation of 75% and a strong VIP win rate of 3.41%, but DNA Star Vegas results are lower than a very strong comparative period of last year. In the first four months of FY17, DNA Star Vegas has recorded a strong VIP win rate of 2.87%, however, this has been lower than the win rate of 3.31% witnessed in the corresponding period last year. Overall, in the first four months of FY 17, DNA has reported the revenue of A$42.0 million, which is $9.8 million lower than the corresponding period last year, due to the strong comparative period at DNA Star Vegas. On a normalized basis, that corrects for the variations in VIP win rates, the net profit after tax is over A$1.7 million lower than the first four months of FY16.
 
Outlook for FY 17: Star Vegas would get the benefit from new markets and VVIP gaming growth, the Star Paradise expansion will introduce to new Thai junkets and players, and will provide additional recurring revenue from FY17. The marketing strategies for Aristo is expected to enhance the number of mass market players visiting the property and expected to reduce the volatility in win rate and earnings. Additionally, DNA has begun discussions with the Thai partner regarding the on-going management of DNA Star Vegas into the FY 18 and beyond. Though these arrangements are not yet finalized, they are expected to be commercially based and reflective of senior executive remuneration packages.
 
Stock Performance: DNA stock fell 26.6% in the last six months (as of February 20, 2017) and is trading at low levels. At the moment, DNA is in a growth phase and the company is aiming to retain sufficient cash to pursue growth opportunities and repay the debt as priorities. Moreover, DNA is well positioned to take advantage of consolidation and growth opportunities in the leisure and hospitality industry in the Asia-Pacific region. Meanwhile, the policy change could benefit struggling Vietnam casinos as some of the casinos in Vietnam have reportedly revealed about the latest decision by authorities in the Asian nation to partially lift their long-standing ban on locals gambling. This could benefit DNA. The group is set to release their 1H 2017 results on February 23, 2017. The interim result is expected to be a mixed bag at the back of lower than expected performance from DNA Star Vegas in the initial period of FY17. However, the group expects DNA Star Vegas performance to improve during the remainder of FY17. The group aims to implement various marketing initiatives and leverage its status of Official Resort Partner of Manchester United in Thailand. Further, June half is expected to be a stronger trading period owing to key public holidays in Thailand. Additionally, the online presence of the group is expected to add to DNA Star Vegas performance while the group is exploring options for utilisation of its online gaming license. Aristo is also expected to benefit from growth in Chinese tourists traveling to Vietnam. Considering the growth prospects in the long term, we give a “Buy” recommendation on the stock at the current price of $ 0.35

 
DNA Daily Chart (Source: Thomson Reuters)

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