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
Mixed Financial and Operational Performance in the 1H FY17: Donaco International Ltd (ASX: DNA) has reported a lower group EBITDA of A$33.3 million in the first half of 2017 as compared to A$39.1 million of the prior corresponding year. On the other hand, the group’s statutory NPAT slightly rose to A$14.8 million against A$14.1 million in the prior corresponding period (pcp). The reported profit after tax included the A$3.7 million of non-recurring expenses relating to the non-cash amortization of warrants, and the previous result including A$11.8 million of non-recurring M&A expenses associated with the Star Vegas acquisition. The group’s revenue fell down to A$59.0 million as compared to A$68.9 million in pcp, primarily due to the lower VIP win rate at Star Vegas and lower VIP turnover at Star Vegas. This is also due to the Australian dollar rising during the period against local currencies wherein The Australian dollar strengthened against the Thai Baht and the Chinese Renminbi and had a negative impact on the results reported in Australian dollars, after currency conversion. However, DNA’s management has maintained its focus on tight cost control during the half, along with a reduction in the corporate costs of approximately A$1 million compared to the December 2015 half. Therefore, the group’s industry leading EBITDA margin was maintained at 56%, despite the lower revenues.
 

1HFY 17 Group Financial Performance (Source: Company Reports)
 
Aristo International Hotel segment delivered decent performance during the period:The Aristo International Hotel has reported a strong operational performance in 1H FY 17, generating a 15% increase in revenue to RMB 69.4 million, and a 19% increase in EBITDA to RMB 42.6 million, along with strong growth in visitations up 63% to 100k patrons. This is due to the fact that the management focused at Aristo on the main floor and away from the VIP segment of the market. Further, the management has successfully implemented initiatives to control operating costs, increase property utilization as well as enhance local visitation and spending in non-gaming areas.
 

First half of 2017 Aristo’s Financial Performance (Source: Company Reports)
 
Star Vegas segment performance affected in the 1H 2017: Star Vegas posted weaker results in the 1H FY 17, primarily due to a lower VIP win rate, which was partially offset by a significant reduction in junket commissions and operating costs. Star Vegas faced difficult trading conditions due to a weakening in the Thai economy and in Thai consumer sentiment, after the passing of the late King of Thailand. DNA also had one less VIP event in the period, with other events cancelled due to the late King’s passing, leading to a reduction in patronage and turnover during the period. As a result, during the first half, the revenue was THB (Thai Baht) 1,200.4 million as compared to THB 1,426.1 million in the previous corresponding period, with a lower win rate on VIP play of 2.75%, as compared to the theoretical win rate of 3.01% recorded in the prior period. The Venue EBITDA reached THB 803.4 million which has fallen 17%, but the normalized revenue EBITDA fell only 1.7% to THB 854.2 million, when adjusting to the theoretical win rate of 2.85% in both periods. However, in recent weeks the company has reported for an improving trend in turnover, which is starting to return to more normal levels, and the improved performance is expected in the second half of FY 17. In addition, the current initiatives from the Tourism Authority of Thailand is expected to boost Thailand as a preferred destination. Accordingly, the current year could to be another promising year for Thai hotels and the industry.
 

1HFY 17 Star Vegas’ Financial Performance (Source: Company Reports)
 
Positive Policy of the Vietnamese Government:The Vietnamese Government has announced for liberalization of gambling for locals in Vietnam, which could provide potential growth options for DNA into the future, as one of the pioneers of casino gaming in Vietnam. Accordingly, the group reported that they would continue to explore the options as the situation develops.     
 
Capital Management:DNA has made the payment of the maiden dividend in the first half of FY 17. Moreover, the group’s net debt position continued to improve with the net debt of A$69.8 million as at December 31, 2016, which is down from A$73.6 million as compared to the end of June 2016. The net debt to equity ratio has reduced to 14.1% as of the end of December 2016 as compared to 15.4% in pcp. This decrease was mainly driven by the corporate costs that were cut by A$1 million, as compared to pcp. Moreover, the cash flow from operations was A$25.4 million for the 1H FY 17, which represents a healthy cash flow conversion of 76% of EBITDA for the six-month period.
 
Positive Outlook for FY17:DNA is expecting improved performance from both venues for the June half of FY17. The operational performance has shown the improvement in the trends during the recent weeks at Star Vegas, which should be reflected in this year’s June half performance as the Thai economy continues to improve. The January 2017 has posted the rolling turnover increase of 8.4%, as compared to last year of the same period. Major public holidays in Thailand might lead to a better June half as compared to the December half. Accordingly, the company’s management is focused on attracting new junkets, and driving VIP gaming growth. Moreover, the marketing strategies for Aristo continues to be focused on increasing the number of mass market players visiting the property, to reduce the volatility in win rate and earnings.
 
Stock Performance: The stock of DNA started the year on a weak note but recovered in the last one month, while generating over 36.92% during the period (as of April 13, 2017). DNA stock was otherwise removed from the S&P/ASX 300 Index effective March 20, 2017. On the other hand, the group said that they are seeing business returning in Thailand lately (earlier some VIP players were not vising the venue during the 100-day mourning period following the passing away of the late king). Hence, they expected a better second half performance for their Star Vegas segment. Moreover, the launch of online gaming at Star Vegas is planned for fourth quarter of FY2017 and the negotiations with Donaco’s Thai partner are on track to confirm their on-going involvement in the business beyond FY2017. The group is considering acquisition of Star Paradise based on rising demand from junkets, but currently managing the business with their monthly fee of THB 5 million and expenses. Meanwhile, DNA’s business remains in a growth phase, with the short-term priority being to repay debt. The company also looks to explore opportunities with the liberalization of gambling for Vietnamese locals that has been flagged by the Vietnamese government. The trading has been strong in the months of January and February 2017 to date, with visitation continuing to increase, and the win rates remaining solid. The company’s board also maintains its intention to pay regular dividends to the shareholders, and will consider this along with other capital management initiatives with the full year results. We give a “Buy” recommendation on the stock at the current price of – $ 0.45 

 
DNA Daily Chart (Source: Thomson Reuters) 

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