Heading Donaco International Limited / 2017 Annual Report Donaco International Limited / 2017 Annual Report 4 5 From the Managing Director Star Vegas is a world class gaming and entertainment property and, following the transition to full management control, we have additional flexibility to implement initiatives to increase visitation and performance. Dear Fellow Shareholders The 2017 financial year produced solid performance, despite a challenging economic period in Thailand following the passing of the late King. The Group generated $136.4 million in revenue, of which Star Vegas contributed $110.2 million, with an underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $84.4 million, only slightly down on the previous year. Aristo in Vietnam continued its strong growth, as we repositioned the business towards the mass market. Overall, our net profit after tax (NPAT) was $31.0 million, including negative non-recurring items of $23.6 million. This amount included the final Star Vegas vendor management fee of $19.0 million, which became payable as the business exceeded its earnings targets. The balance of non-recurring items related to non-cash movements with respect to warrants. In FY16 the non-recurring items totalled a positive $24.1 million, predominantly due to the benefit of the revaluation of Star Vegas following its acquisition, offset by the initial vendor management fee and acquisition expenses. After adjusting for the non-recurring items, our underlying net profit after tax of $54.6 million was in line with last year. The cash flow from operations of $47.4 million remained strong, although slightly below the $50.0 million generated last year. Despite the subdued consumer sentiment and economic climate in Thailand, the Star Vegas property experienced only a moderate reduction in revenue, and a favourable increase in the VIP gross win rate to 3.54%, which was up from 3.16% achieved over FY16. We should note that given the inherent volatility of the VIP gaming business, we do not always expect to have the win-rate run so strongly in our favour. We were also pleased to see management initiatives to improve utilisation of the venue take effect, with non-gaming revenue experiencing robust growth over the year. Overall, net profit after tax at Star Vegas declined by 7.3% to THB1,466 million. The previous contract with the former Thai vendor for the management of the Star Vegas property expired in accordance with its agreed terms on 30 June 2017, and his involvement with the Star Vegas business ceased on 30 June 2017. Management of the venue has now been taken in-house by Donaco, and all key management roles have been filled, utilising our extensive experience in managing Asian casino operations. We move ahead into FY18 in full operational control of the venue. Star Vegas is a world class gaming and entertainment property and following the transition to full management control, we have additional flexibility to implement initiatives to increase visitation and performance. As part of our strategy to increase visitation from international players, we signed a contract in June 2016 with international casino marketing agency, Vivo Tower Limited, to sign up international junkets and to bring players to the property from all around Asia. During the year we announced a partnership with Poker King Club to host a major international poker tournament, which was accredited as the South-East Asian leg of the Asian Poker Tour. The event included a press conference held by the guests of honour, the Manchester United ‘Class of ’92’ players. This tied in with the official launch of our Manchester United partnership, which is designed to increase awareness and visitation of Star Vegas property for the target market of middle-class Thai visitors. As we enter FY18 we have made good progress in signing up additional junket operators, with new customers joining us during August and September 2017, and further arrangements due to commence in the coming months. Although we do expect the earnings from the VIP portion of the business to be lower in the September quarter, this line of business is currently rebuilding well. Overall, the main hall and slot machine business has remained robust during the transition period to Donaco management, and we have now been able to implement significant cost savings in the areas of staffing and procurement. Some of our new junket customers will shortly commence offering online gaming as new facilities are built out. In addition, we have brought in a number of professional third-party operators to build new entertainment facilities, at their own cost, for our VIP guests. The new facilities include a nightclub, karaoke rooms and a new café, which will help to generate additional visitation to the property. In Vietnam, the Aristo International Hotel continued to grow strongly over the course of FY17, with impressive EBITDA growth driven by increases in both gaming and non-gaming revenue. Tight cost management resulted in outstanding NPAT growth of 130.9% to RMB31.8 million. Our visitor numbers continued to grow, up 18% to 174,000 over FY17, including a new monthly record of 18,356 players in August 2016. Our marketing strategies were focused on increasing lower volatility mass market play, which drove strong growth in net gaming revenue (up 36%), while our non-gaming revenue also grew, up 12% over the previous year. The average VIP win rate achieved was 2.28%, a slight improvement on last year’s 2.20%. We recorded particularly strong growth in slot machine revenues at the Aristo, up 62% for the year to RMB14.9 million. To capitalise on this growth, we added 10 new Aruze slot machines to the gaming floor in April 2017, which resulted in particularly strong growth of 238% in slot machine revenue in the fourth quarter. In recent years, our focus has been on developing a leading Asian gaming and entertainment brand, and with two blue- chip assets under our management, we are uniquely placed to grow over the long term. I am excited about our prospects as we implement our management plans for our key Star Vegas asset, at a time when we approach the conclusion of Thailand’s official mourning period. We anticipate that the business will gain momentum in FY18, with activity at Star Vegas expected to recover to normal levels following the first quarter. We also expect to benefit from the deal with Vivo Tower, as new entertainment facilities are built out and offered to our guests. This will help to utilise the full capacity of the venue. At the Aristo, we will continue to focus on the mass market and slot machines, to further increase earnings from both the gaming and non-gaming assets. Overall, it is a promising time for our business and we look forward to keeping you updated on the progress of our management initiatives. Joey Lim Managing Director and Chief Executive Officer