Operator News

Cambodia – Star Vegas impairment charge leaves Donaco at a loss

By Phil - 23 September 2019

Donaco International, an Australia-listed Asia casino operator, suffered a loss after tax of US$133m for the year ending June 30 due to an ongoing legal dispute with its Star Vegas casino in Cambodia.

Group revenue was down to $86.3m with Star Vegas impacted by competition from the nearby Winsor, Paramax and the new Galaxy casinos in Poipet. Increased VIP turnover and visitation at Star Vegas were offset by unfavourable junket deals signed by former management, which are now being renegotiated. Star Vegas experienced lower VIP win rate. Revenue at Aristo was impacted by reduced visitation in July/August 2018. A significant improvement was seen in the June 2019 quarter, with 17,500 average monthly visitors, up from 13,200. Donaco has also benefitted from significant cost reductions in corporate operations, due to reduced marketing spend and tighter control of entertainment expenses.

Donaco Chairman Stuart McGregor, said, “We have an extremely challenging year with significant management disruption, and the full-year results reflect that lack of professional management at the casino venues. The results also reflect the fact that the Board was distracted by ownership and control issues. We are disappointed to present another significant loss at the statutory level as we seek to resolve the litigation issues with the vendor of Star Vegas, but we are encouraged that both our businesses continued to operate profitably and produce positive cash flows, and our financial position continues to remain solid with further debt reduction, and improved terms and covenants secured for our Mega Bank debt.”

The loss has been attributed in part to a non-cash impairment charge on the Star Vegas Resort and Club licence valued at $128.2m (AUS$186.6m).

The Star Vegas, which is the largest casino in Poipet, is one of two casinos that Donaco owns and operates. The company also owns Aristo International Hotel, which is located in the northern part of Vietnam close to the Chinese border.
Donaco acquired Star Vegas from Somboon Sukjaroenkraisri, a Thai politician and businessman, for $360m in 2015, but following claims of forfeiting a non-compete clause in the sale agreement by building two casinos adjacent to Star Vegas, Donaco sued him, leading to a bitter, prolonged legal battle.

Last month, an arbitrator in Cambodia ruled in favour of Mr Somboon.

Donaco stated: “The arbitrator has ruled that Lee Hoe Property was entitled to terminate the lease in these circumstances. However, the arbitrator has also ruled that Mega Bank’s registered security over the lease is not discharged by this decision. The arbitrator has also rejected claims by both parties for damages and legal costs. Donaco has already filed an appeal to the Appeal Court in Phnom Penh against certain procedural aspects of the arbitration process. Donaco will now file a further appeal against the decision itself. While the appeal process is pending, it is business as usual for Donaco, and specifically for the Star Vegas business.”

Mr. McGregor said: “We have been frustrated by the Cambodian lease arbitration decision; but I wish to assure investors that we have taken swift action in appealing that decision to the Phnom Penh Appeals Court, and we still expect that our position will be vindicated in due course. We are also progressing with the Singapore arbitration claim.”

StarVegas offers 170 gaming tables, predominantly baccarat, and 1,007 Electronic Gaming Machines (EGMs), of which 338 are owned outright and 669 under profit share deals.

The company has strengthened its board with two independent directors. David Green is very experienced in Cambodia and Vietnam, and advised the Macau SAR Government on its casino liberalisation and regulation; and Yugo Kinoshita, the Global CEO of Aruze Gaming America, a global slot machine gaming and device business. It has also appointed Leo Chan and Kurkye Wong of Argyle Street Management as non-executive directors, as well as Paul Arbuckle as the Group CEO. He has 30 years of gaming experience across Australia and Asia, including positions as the Chief Operating Officer at The Star Entertainment Group, and senior roles at Resorts World Sentosa.

Mr. Arbuckle said: “The results reflect a lack of senior casino management oversight for almost all of the financial year, as well as heightened competition in the Poipet area, particularly from the Winsor, Paramax and Galaxy casinos. Slot machine revenue declined by 24.5 per cent following the changeover to newer slot machines, and this is unacceptable. The EBITDA decline was due to a combination of the lower win rate, higher staff count required to replace staff that were poached by the Thai vendor, and higher marketing costs related to our events program, which drove the strong increase in visitation. We intend to look closely at the appropriateness of each these aspects of the business. We have introduced a range of improvements for the 2020 financial year, and the early signs are encouraging with a strong July being recorded, which is flowing through into our August results to date.”

Mr. McGregor concluded: “Star Vegas is an exceptional business, and even with the recently increased level of competition it remains a premier venue in the Poipet strip. Despite difficulties during the year, the business still had a profitable baseline performance. Overall we expect to see significantly improved performance from both Star Vegas and the Aristo over FY20, as a result of the new Board and professional management team, and the new management initiatives that are currently being introduced.”