Nagacorp right now is one of the more dangerous casino stocks in the world to invest in. It’s especially dangerous as opposed to others because the company is specifically very confident it will sail through the current COVID-19 depression that it is throwing caution to the wind.
The last time we covered this stock here was in October 2015. Since then, and despite a 36% fall from pre-COVID-19 highs, the stock is up an amazing 70%. If you have any profits, I’d suggest locking them in now. I have always been wary of Nagacorp and companies with similar business models. In my last coverage I was cautiously optimistic and said that investors considering investing in this casino should do so only as an income investment with a time horizon of 2020. Well, 2020 is here, the gains are huge, and now it’s time to move on. I am no longer cautiously optimistic here.
This is a company that has the potential to fall quickly. I do not know if it will for sure, but the risk is too big and I don’t trust the optimism in its recent press releases that essentially say that everything will be just fine.
Nagacorp is very reliant on its government monopoly, so much so that management believes COVID-19 will do very little to harm operations even short term. Nagacorp believes it can be as spendthrift as it wants to be because the thinking at the highest levels is that no matter what it does and no matter what happens, it can rely on its monopoly to bail it out of any trouble. This can make its business decisions especially careless when real problems do show up.
Cambodia’s reports on infection rates in the country are one thing. Officially, there are only 122 total cases in the country that sees most of its tourism from China, and zero deaths. A single report that one person who worked in Nagaworld was infected, met with such fierce opposition from the company that the phrase “Thou doth protest too much” comes to mind. Apparently the worker was named and Nagacorp denied that any such person even worked at the casino. Other companies would have either stayed silent or said something neutral like “Nagacorp continues to stay vigilant and values the health of its staff,” or something along those lines.
Until now, Nagacorp really has been in an especially good setup. Nagaworld has only been shut down as of April 1, and until that date all the VIPs that couldn’t go to Macau because of travel restrictions and closures went to Nagacorp instead. Essentially, it has been one of the few that have actually seen a positive COVID-19 bump. From a recent press release:
NagaWorld is one of the few gaming destinations in the Asia Pacific region for Chinese visitors because Cambodia has not imposed travel restrictions against travellers from China till 30 March 2020. Moreover, with the relatively low incidence of the Covid-19 especially during the first two and half months of the Current Period, VIP players felt more comfortable to visit NagaWorld.
This has kept its numbers up until April 1 when all casinos were ordered closed. But if Cambodia really has the virus under control, then why close everything now when the number of infections and deaths internationally are finally starting to fall?
Really though, the main problem with Nagacorp isn’t that it’s unclear how the virus has affected the country. Let’s give it the benefit of the doubt and assume all data on infection rates were true, the casino’s management still seems to have little idea that there even could be such a thing as severe economic consequences due to lockdowns of neighboring Asian economies. The company has issued the following statement that even shows pride in its invincibility, basically flaunting its monopoly as if it has absolutely nothing to worry about. “…[w]e believe the life span of the COVID-19 is shorter than the duration of our monopoly which lasts till 2045.” Nagacorp is certainly not the first monopoly to believe in its own invincibility.
Overconfidence is not new with Nagacorp either. See this statement from its 2019 Annual Report, which has an interesting view on what the company calls “risk management” (page 13):
Management of the Group continues to adopt a conservative gaming policy, diluting the risks by offering more incentives to junket operators. With improvements in operating efficiencies and rigorous financial discipline, the Group has been able to keep its operating costs reasonably low.
How exactly do you dilute risks by becoming even more reliant on VIPs and the junkets that ferry them over to Cambodia? Nagacorp’s idea of a “conservative gaming policy” is to pay junkets even more money? That’s what it comes down to? It thinks all it has to do is throw money at a problem and it’ll go away. This is supposedly “conservative”. Conservative would be developing more diversified markets, not focusing even more resources on high rollers.
As my colleague Steven Stadbrooke points out, Nagacorp has been praising the Chinese government in its press releases, even copying straight out of its state-run propaganda on how amazing its response to the pandemic has been.
Then there’s the issue of labor unions. Live by the union, die by the union. Nagacorp just recently resolved a union strike from workers who earn between $150-250 a month. What Nagacorp does not understand is that the dollar could collapse very quickly now especially with food shortages piling up in the US from broken supply chains. That means these meager salaries aren’t going to buy much of anything soon, even with the raises that have temporarily solved the latest labor dispute for now.
Speaking of supply chains, here’s a possible chain of how the US dollar could fall and affect Nagacorp. Broken food supply chains in the United States push up consumer prices in addition to all the dollars that have been printed, which brings up price inflation measures, which hammers Treasury prices. China has to sell a bunch of its holdings to the Federal Reserve before they lose too much value, which makes the US national debt unpayable, and a run on the dollar begins in the midst of a food supply crunch in the US. The US can no longer afford to import goods from China in such vast numbers, and there goes your VIP segment. The VIP population in China are exporters earning US dollars. And all Nagacorp is thinking of is their monopoly grant that won’t mean much if there isn’t as much VIP business to monopolize in the first place.
Plus, in a move meant to show too much confidence, Nagacorp is still proudly paying dividends. Oh boy. They could end up regretting that soon.
Companies with monopolies grow fast and burn out quickly. Nagacorp will likely be no different. The COVID-19 lockdowns could set them back years at least and could severely damage business for the long term, regardless of the company’s optimism.