FRIDAY, 11 MARCH 2016

Leisure & Resorts World Corp:

A relatively cheap gaming play

Strong exposure to the gaming sector. Leisure & Resorts World Corporation (LR) is a holding
company with strong exposure in the gaming sector. It is currently the market leader in the retail
gaming sector, with a total of 8,700 E-Bingo machines and 1,900 eCasino terminals. The company
also acts as the master gaming licensor and regulator for the Cagayan Economic Zone Authority.
In addition, LR also has a stake in Midas Hotel and the gaming operations inside the hotel. Lastly,
through its fully-owned subsidiary AB Leisure Global Inc. (ABLGI), LR has an economic interest in the
gaming operations of City of Dreams Manila. Its gaming-related businesses online gaming, retail
gaming, Midas Hotel and Casino, and interest in City of Dreams, account for 94.6% of its income as
of 9M15.
First Cagayan continues to be a key driver of income growth. Among the gaming subsidiaries, the
two subsidiaries located in the Cagayan Special Economic Zone and Freeport namely FCLRC and
FCCDCI have been LRs main income growth drivers. FCLRC regulates and monitors on behalf of
CEZA all activities pertaining to the licensing and operation of interactive games. It collects 2.0% of the
net wins of its operators as hosting fees and remits 1.0% to CEZA. Given the revenue and earnings
driver of FCLRC is total net wins by all of its licensed operators, FCLRC is looking to increase the
number of licenses from 124 last year to 142 this year to drive growth.
Cementing dominance in the retail gaming space. Through its subsidiaries ABLE and TGXI, LR is
the leading retail gaming operator with 122 bingo sites (traditional and electronic) and 55 eCasino sites.
LR remains bullish on the retail gaming space as they see demand growing in line with the growth in
disposable income. LR also believes that the retail gaming space is still underpenetrated. Opportunity
for expansion will be in provinces outside NCR where there are numerous forms of informal gaming.
LR intends to increase its gaming sites from 177 to 375 by 2020, a CAGR or 16.20%.
Beneficiary of City of Dreams Manila ramp up. LR will benefit from MCP through its subsidiary AB
Leisure Global Inc. Based on an agreement between ABLGI, BEL, and PLAI, the former will receive
30% of BELs leasing income from MCP, and also 30% of PLAIs share of gaming EBITDA from MCP.
Although the current net income contribution of ABLGI still remains low at 4.2% as of 9M15, this
should increase going forwards as MCPs ramp up of casino operations materialize.
FORECAST SUMMARY

Year to December 31 (Php Mil)

Revenues
% change y/y
Operating Income
% change y/y
Operating margin
Net income
% change y/y
Net margin
EPS (cents)
% change y/y

RELATIVE VALUE
P/E (X)
P/BV (X)
ROE (%)
Dividend Yield (%)
so urce: LR, COL est imat es

2012
4,533
218

279

0.28

27.4

0.5

2013
5,061
11.6
352
61.4
7.0
324
15.9
6.4
0.21
-27.4

2014
6,580
30.0
819
132.7
12.4
750
131.6
11.4
0.49
135.1

37.7
2.0
6.8
0.5

16.0
1.7
14.7
0.8

SHARE DATA

N/A

Rating
Ticker
Fair Value (Php)
Current Price
Upside (%)

LR
N/A
7.78
N/A

SHARE PRICE MOVEMENT

110

100

90

80

70
11-Dec-15

11-Jan-16
LR

11-Feb-16

11-Mar-16

PSEi

ABSOLUTE PERFORMANCE
LR
PSEi

1M
6.72
6.77

3M
-4.89
5.63

YTD
1.97
2.33

MARKET DATA
Market Cap
Outstanding Shares
52 Wk Range
3Mo Ave Daily T/O

9,334.85Mil
1,199.85Mil
6.56 - 10.82
8.12Mil

Richard Laeda, CFA

richard.laneda@colfinancial.com
Meredith Hazel Cua
meredith.cua@colfinancial.com

PHILIPPINE EQUITY RESEARCH

Company Background
Leisure & Resorts World Corporation (LR) is a holding company with strong exposure in the gaming
sector. It is currently the market leader in the retail gaming sector, with subsidiaries AB Leisure
Exponent, Inc. (ABLE) and Total Gamezone Xtreme, Inc. (TGXI) having a total of 8,700 E-Bingo
machines and 1,900 eCasino terminals. The company also acts as the master gaming licensor and
regulator for the Cagayan Economic Zone Authority or CEZA through its majority-owned subsidiary,
First Cagayan Leisure and Resorts Corporation (FCLRC). In addition, LR also has a stake in Midas
Hotel and the gaming operations inside the hotel. Lastly, through its fully-owned subsidiary AB Leisure
Global Inc. (ABLGI), LR has an economic interest in the gaming operations of City of Dreams Manila.
Outside the gaming sector, LR also has some exposure in the property sector. It is engaged in the
development and leasing of office buildings through its 50%-owned subsidiary Techzone Philippines,
Inc. (TPI). The company also receives 30% of the leasing revenues that BEL receives from MCP
through ABLGI.
Exhibit 1: Ownership structure

source: LR

While LRs subsidiaries seem diversified, looking at it closely, we see that LR derives much of its
income from the gaming sector. Its gaming-related businesses online gaming, retail gaming, Midas
Hotel and Casino, and interest in City of Dreams, account for 94.6% of its income as of 9M15.
Exhibit 2: Net income contribution as of 9M15 (in PhpMil)

Subsidiary 9M15 net income % of Total

FCLRC
379
47.3%
Online Gaming
FCCDCI
39
4.9%
ABLE
214
26.7%
Retail Gaming
TGXI
9
1.1%
HEPI
58
7.2%
Midas Hotel and Casino
PIKI
25
3.1%
City of Dreams
ABLGI
34
4.2%
LRLDI
10
1.2%
Office Leasing
TPI
142
17.7%
Parent
(109)
-13.6%
Total
801
100.0%
source: LR

FRIDAY, 11 MARCH 2016

LR

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

First Cagayan continues to be a key driver of income growth

Among the gaming subsidiaries, the two subsidiaries located in the Cagayan Special Economic Zone
and Freeport namely FCLRC and FCCDCI have been LRs main income growth drivers. Profits from
the two companies have increased by a CAGR of 58% during the period 2011-2014. As of 9M15,
combined net income of Php418Mil was up 45% y/y, accounting for 52.2% of LRs total net income.
Exhibit 3: FCLRC and FCCDCIs historical net income

source: LR

FCLRC is the master gaming licensor and regulator for Cagayan Economic Zone Authority or CEZA.
Their duty is to regulate and monitor on behalf of CEZA all activities pertaining to the licensing and
operation of interactive games. As the regulator, FCLRC collects 2.0% of the net wins of its operators
as hosting fees and remits 1.0% to CEZA. The revenue and earnings driver of FCLRC is the amount
of net wins by its licensed operators.
As a regulator but not an operator, FCLRC can increase its hosting fees by increasing the number
of licensed operators. Total number of licensees has been growing since 2009. From 40 licensees in
2009, the number has grown to 124 in 2015. The company hopes to increase this by ~15% to 142
licensees this year and this will boost its revenues and income for the succeeding years.
FCLRCs licensees are involved in a variety of gaming activities such as video streaming or eCasino,
proxy betting and sports book. These activities are different from the traditional casino. For example,
video streaming and proxy betting enables gambling even though the player is not physically in the
premises. Sports betting is unique to FCLRC and targets foreign players. Because of the different
activities offered and number of licensees, FCLRC benefits from diversification and has less risk and
exposure to a single type of player.

FRIDAY, 11 MARCH 2016

LR

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

Exhibit 4: Licensee count

source: LR

Aside from FCLRC, LR also has a stake in First Cagayan Converge Data Center or FCCDCI which
provides a range of services to internet gaming operators at the Cagayan Special Economic Zone
and Freeport. For the first nine months of FY15, FCCDCI contributed Php39Mil to LRs net income
and this should grow in line with the number of locators in First Cagayan.

Cementing dominance in the retail gaming space

LRs retail gaming business is its second largest income contributor, with Php223Mil in 9M15 profits
accounting for 27.8% of total net income. Through its subsidiaries ABLE and TGXI, LR is the leading
retail gaming operator with 122 bingo sites (traditional and electronic) and 55 eCasino sites.
LR remains bullish on the retail gaming space as they see demand growing in line with the growth
in disposable income. BPO revenues and OFW remittances remain solid and these continue to be a
big factor for the growth in disposable income.
LR also believes that the retail gaming space is still underpenetrated based on the number of
machines per person in the country. Opportunity for expansion will be in provinces outside NCR
where there are numerous forms of informal gaming. LR intends to increase its gaming sites from
177 to 375 by 2020, a CAGR or 16.20%. This will not only drive revenues and income for the group
but it will also cement its position as the leader in retail gaming.

FRIDAY, 11 MARCH 2016

LR

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

Exhibit 5: Penetration vs other countries

Rank
1
2
3
4
5
6
7
8
9
10

Country Number of EGMs Population (in Mil) People per Machine

Japan
4,611,714
127
28
USA
886,386
319
360
Italy
456,367
62
135
Germany
273,530
81
296
Spain
212,153
48
225
Australia
199,829
23
114
UK
165,448
64
385
Canada
97,195
35
358
Mexico
90,000
120
1,337
Pero
77,059
30
391
Philippines
22,654
108
4,720

source: LR

Office leasing set to expand

LR has opportunistically entered the office leasing market through its 50%-owned Techzone
Philippines, Inc. (TPI). Recognizing that its licensed operators in First Cagayan need office spaces,
LR put up a 28-storey office building with 43,000sqm of gross leasable space to cater to the specific
needs of their operators. According to LR, only half of its operators are being serviced by TPI and so
they plan to put up another building to address the demand from existing and potentially new gaming
operators.

Midas Hotel operations doing well after takeover

LR has an exposure in Midas Hotel and Casino through its subsidiaries Hotel Enterprises Philippines
Inc. (HEPI) and Prime Investments Korea Inc. (PIKI).
HEPI is in charge of the operations of Midas Hotel and Casino. The property has 227 hotel rooms.
Prior to the takeover of LR, occupancy of its hotel was just at 45% but has improved to 75%. Aside
from the operations of the hotel, HEPI also has a casino that is being operated by PAGCOR. The
casino currently has 35 gaming tables and 310 slot machines and HEPI receives 35% of the net
gaming revenues.
In addition, PIKI, together with PAGCOR, has issued a junket agreement to jointly conduct the junket
gaming operations of Midas Hotel and Casino. According to management, the e-junket business has
been raking in ~Php400Mil in gross gaming revenues per month. PIKI receives roughly 4-5% of GGR
as income. Players of such are usually comprised of foreign players.
Management is currently looking at a 3,000sqm space located at the back of the hotel for further
expansion and development of Midas.

FRIDAY, 11 MARCH 2016

LR

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

Beneficiary of City of Dreams Manila ramp up

AB Leisure Global Inc. (ABLGI) was originally the operator tapped for the hotel and casino project of
BEL before it was assumed by MCP. The agreement was amended such that ABLGI was to give BEL
Php4Bil in funding for a 30% interest in BELs net lease income and 30% of PLAIs gaming EBITDA
from the casino. Recall that BEL constructed the building and facilities of MCPs City of Dreams. In
exchange, BEL will receive lease income from MCP. Moreover, as the original holder of the gaming
license PLAI, receives a 50% share in MCPs gaming EBITDA.
Current net income contribution of ABLGI still remains low at 4.2% as of 9M15. As MCPs ramp up of
casino revenue materializes, ABLGIs revenues from the project should also increase.

Cheap compared to local peers

Based on annualized 9M15 EBITDA, we estimate that LR is currently trading at 9.4X 2015E EV/
EBITDA. This is at a 42.3% discount to the industry median of 16.3X. We believe there are numerous
factors for the discount in its valuation. One may be because LR is holding company of multiple
subsidiaries with exposure to different gaming-related businesses and not a pure-play gaming
company like BLOOM or MCP. Another reason is the low liquidity of the shares, making it less
attractive for bigger funds.
Exhibit 6: Relative Valuation

BEL
RWM
BLOOM
MCP
PLC
Median
LR

2015E EV/EBITDA
11.9
9.0
16.3
32.1
22.8
16.3
9.4

source: COL estimates, Bloomberg

There is currently no consensus rating on LR.

NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A
RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION, OBTAINED BY
THE ANALYST DURING MEETINGS WITH MANAGEMENT. COL FINANCIAL DOES NOT COVER
THIS COMPANY AND HAS NO RATING ON THE STOCK.

FRIDAY, 11 MARCH 2016

LR

FIELD NOTES

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PHILIPPINE EQUITY RESEARCH

Investment Rating Definitions

BUY

HOLD

SELL

Stocks that have a BUY rating have attractive

fundamentals and valuations, based on
our analysis. We expect the share price
to outperform the market in the next six to
twelve months.

Stocks that have a HOLD rating have either

1.) attractive fundamentals but expensive
valuations; 2.) attractive valuations but
near term earnings outlook might be poor
or vulnerable to numerous risks. Given the
said factors, the share price of the stock may
perform merely inline or underperform the
market in the next six to twelve months.

We dislike both the valuations and

fundamentals of stocks with a SELL rating.
We expect the share price to underperform in
the next six to twelve months.

Important Disclaimers
Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are
subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a
security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of
securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.

2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines
Tel: +632 636-5411

FRIDAY, 11 MARCH 2016

LR

Fax: +632 635-4632

FIELD NOTES

Website: http://www.colfinancial.com

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