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FRIDAY, 11 MARCH 2016

Leisure & Resorts World Corp:


SHARE DATA
A relatively cheap gaming play
Rating N/A
Strong exposure to the gaming sector. Leisure & Resorts World Corporation (LR) is a holding
Ticker LR
company with strong exposure in the gaming sector. It is currently the market leader in the retail Fair Value (Php) N/A
gaming sector, with a total of 8,700 E-Bingo machines and 1,900 eCasino terminals. The company Current Price 7.78
also acts as the master gaming licensor and works with the Cagayan Economic Zone Authority (CEZA) Upside (%) N/A
to help regulate a jurisdiction for online gamble. 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 SHARE PRICE MOVEMENT
Dreams, account for 94.6% of its income as of 9M15.
110

First Cagayan continues to be a key driver of income growth. Among the gaming subsidiaries,
100
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. CEZA charges a 90

hosting fee of 2.0% of the locators net wins, of which 1.0% goes to FCLRC. Given that the revenue
and earnings drivers of FCLRC is total net wins of all of its licensed operators, FCLRC is looking to 80

increase the number of licensees from 124 last year to 142 this year to drive growth.
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Cementing dominance in the retail gaming space. Through its subsidiaries ABLE and TGXI, LR is
11-Dec-15 11-Jan-16 11-Feb-16 11-Mar-16

LR PSEi
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. ABSOLUTE PERFORMANCE
LR intends to increase its gaming sites from 177 to 375 by 2020, a CAGR or 16.20%.
1M 3M YTD
Beneficiary of City of Dreams Manila ramp up. LR will benefit from MCP through its subsidiary AB LR 6.72 -4.89 1.97
Leisure Global Inc. Based on an agreement between ABLGI, BEL, and PLAI, the former will receive PSEi 6.77 5.63 2.33
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.
MARKET DATA
FORECAST SUMMARY Market Cap 9,334.85Mil
Year to December 31 (Php Mil) 2012 2013 2014 Outstanding Shares 1,199.85Mil
Revenues 4,533 5,061 6,580 52 Wk Range 6.56 - 10.82
% change y/y 11.6 30.0
3Mo Ave Daily T/O 8.12Mil
Operating Income 218 352 819
% change y/y 61.4 132.7
Operating margin 7.0 12.4
Net income 279 324 750
% change y/y 15.9 131.6
Net margin 6.4 11.4
EPS (cents) 0.28 0.21 0.49
% change y/y -27.4 135.1 Richard Laeda, CFA
richard.laneda@colfinancial.com
RELATIVE VALUE
P/E (X) 27.4 37.7 16.0 Meredith Hazel Cua
P/BV (X) 2.0 1.7 meredith.cua@colfinancial.com
ROE (%) 6.8 14.7
Dividend Yield (%) 0.5 0.5 0.8
so urce: LR, COL est imat es
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 works with the Cagayan Economic Zone Authority or CEZA to help regulate online gambling
through its subsidiaries First Cagayan Leisure and Resorts Corporation (FCLRC) and First Cagayan
Converge Data Center, Inc. (FCCDCI). 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

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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 helps regulate online gambling within the Cagayan Special
Economic Zone and Freeport. Their duty is to regulate and monitor on behalf of CEZA all activities
pertaining to the licensing and operation of interactive games. CEZA, as the regulator, charges a
hosting fee of 2.0% of the net wins of the licensees, of which 1.0% goes to FCLRC. However, all the
costs of managing the jurisdiction is for First Cagayans account. In addition, all of First Cagayans
locators are not allowed to have customers from the Philippines and the United States

As the master gaming licensor, 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.

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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.

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PHILIPPINE EQUITY RESEARCH

Exhibit 5: Penetration vs other countries


Rank Country Number of EGMs Population (in Mil) People per Machine
1 Japan 4,611,714 127 28
2 USA 886,386 319 360
3 Italy 456,367 62 135
4 Germany 273,530 81 296
5 Spain 212,153 48 225
6 Australia 199,829 23 114
7 UK 165,448 64 385
8 Canada 97,195 35 358
9 Mexico 90,000 120 1,337
10 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 leases space to PAGCOR that operates their casino.
It receives 35% of the gross gaming revenues as its lease payment. The casino currently has 35
gaming tables and 310 slot machines.

In addition, PIKI executed a junket agreement with PAGCOR in 2013 to jointly conduct the junket
gaming operations within PAGCORs Casino Filipino-Midas site. The telebets made with PIKI are all
from overseas players. As the junket agreement holder, PIKI receives a small percentage (~4%) of
the gross gaming revenues as income.

Management is currently looking at a 3,000sqm space located at the back of the hotel for further
expansion and development of Midas.

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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


2015E EV/EBITDA
BEL 11.9
RWM 9.0
BLOOM 16.3
MCP 32.1
PLC 22.8
Median 16.3
LR 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.

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PHILIPPINE EQUITY RESEARCH

Investment Rating Definitions

BUY HOLD SELL

Stocks that have a BUY rating have attractive Stocks that have a HOLD rating have either We dislike both the valuations and
fundamentals and valuations, based on 1.) attractive fundamentals but expensive fundamentals of stocks with a SELL rating.
our analysis. We expect the share price valuations; 2.) attractive valuations but We expect the share price to underperform in
to outperform the market in the next six to near term earnings outlook might be poor the next six to twelve months.
twelve months. 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.

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 Fax: +632 635-4632 Website: http://www.colfinancial.com

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