DONACO INTERNATIONAL LIMITED 2018 ANNUAL REPORT 6 7 DONACO INTERNATIONAL LIMITED 2018 ANNUAL REPORT Despite this, slot machine revenue was only down slightly. Non-gaming revenue increased by 12.7%, to now make up 46% of total revenue, reflecting initiatives put in place to diversify the business. Looking forward into the new financial year, our management team will continue to focus on rebuilding and improving the Star Vegas business, with multiple initiatives in progress. Over the medium term, we expect to drive growth from the newly launched online gaming platform. At Aristo, we aim to further increase the number of mass market players visiting the property, and will selectively allow junket play when appropriate. And at both properties, we are focused on growing non- gaming revenues to diversify earnings streams. Our Board will continue to pursue the multiple legal actions which are in progress, and we remain confident of our position in these proceedings. Overall, we look forward to restoring and growing the group earnings into the 2019 financial year and beyond. Joey Lim Managing Director and Chief Executive Officer In August 2018, we were pleased to announce that we have now launched our long awaited online gaming operations. It has taken us some time to make sure we have the right model and system, and we have now gone live with an advanced software platform that has been optimised for both mobile and desktop devices. The platform has a live dealer and sportsbook, supports multiple languages and currencies, and will be offered to downstream partners, who will market to their own customer bases. We look forward to this becoming a significant revenue driver for us over the medium term. The performance of the Aristo has been pleasing, with the property level NPAT growing by 19% on last year, assisted by lower finance costs and depreciation and amortisation. Property level earnings before interest, tax, depreciation and amortisation (EBITDA) fell 4% to RMB71.8 million due to a lower win rate, but the normalised EBITDA (using the theoretical win rate) improved by 38% to RMB151.3 million. The Aristo VIP turnover improved significantly by 46%, as new VIP junkets were selectively allowed into the property. However total revenues at Aristo slightly reduced, with net gaming revenue 10.8% below last year. This is due to the lower win rate of 1.9%, compared to 2.3% in FY17, which was caused by a single VIP player winning RMB22.6 million during July and August 2017. Since that time the win rate has stabilised. Visitation at the Aristo was down 12% compared to last year, due to the cancellation of a marketing initiative which was not meeting our objectives. The new management team put in place at Star Vegas following the conclusion of the vendor’s management contract was unexpectedly faced with the challenge of rebuilding the Thai junket business, as the former junkets were poached and went to competing casinos operated by the vendor. It was pleasing to see their response to the challenge. We finished the financial year with five new junket operators at Star Vegas, and that was reflected in the second half VIP turnover, which improved by 54% over the first half. There has been a substantial upgrade to the non-gaming facilities at the Star Vegas, together with refurbished hotel rooms. The slot machine inventory has been refreshed during the year, and we expect this to increase revenue during the 2019 financial year. During the year we also introduced the Bally casino management system at the property, which has allowed us to introduce a new loyalty scheme. Despite all this activity, our operational costs were tightly managed and decreased by 11% compared to the previous financial year. We have also reached agreement in principle for a new tour group operator to bring in Chinese tourists, with the aim of filling our second main hall. I would also like to acknowledge the changing role of Vivo Tower during the year. We originally engaged them to fill unused space at Star Vegas, by marketing it to non- Thai junket operators and players, and to bring in tenants to operate non-gaming facilities. However, following the breaches by the Thai vendor, Vivo was redirected to bring in new Thai junkets, and also assist us in improving the non-gaming amenities. We have now established a new nightclub, karaoke bar, spa and sauna, and a Chinese restaurant. We have also engaged third party online gaming operators to take space under rental deals. As the management transition from the vendor is now complete, we have restructured the arrangements with Vivo. Under a new agreement, Donaco will receive direct rental payments from tenants brought in by Vivo, and Vivo have now been engaged to market and manage the Donaco online gaming platform, in return for a revenue share. Dear fellow shareholders, Donaco recorded a statutory loss of $124.5 million during the 2018 financial year, compared to a profit of $31 million the previous year. The primary factor was the Board’s decision to incur a non- cash impairment charge of $143.9 million in the value of the Star Vegas casino license, as a result of the breaches of the non-compete provisions by the vendor. Our underlying earnings result, after adjusting for the non- recurring items, produced a net profit of $18.3 million. This was below last year’s levels of $54.6 million, again due to the significant drop in VIP turnover at Star Vegas as a consequence of the breaches by the vendor. Aristo continued to perform solidly during the year, and despite a lower win rate than last year it recorded a higher profit than last year, with strong growth in the VIP turnover at the property. Despite the negative headline result, our group financial position remains strong, retaining positive cash flows of $34.6 million. Our net debt to equity reduced to 6.3% at the end of June, and a further principal repayment of US$8.55 million was made in August. During the year, the new management team efficiently managed the cost base across the group, and despite the challenges, both properties were profitable. Revenue at Star Vegas dropped from $110.2 million to $66.6 million, due to the poaching of our junkets by the Star Vegas vendor. There was also a backdrop of continuing subdued domestic demand in Thailand, which held back growth in the main floor revenues. The Star Vegas VIP win rate of 3% was closer to the theoretical range, but significantly lower than the very high win rate of 3.54% recorded last year. FROM THE MANAGING DIRECTOR FROM THE MANAGING DIRECTOR “ In August 2018, we were pleased to announce that we have now launched our long awaited on-line gaming operations. It has taken us some time to make sure we have the right model and system, and we have now gone live with an advanced software platform that has been optimized for both mobile and desktop devices.”