Cambodian rule weighs on Dreamgate’s RM200m debt notes

Writen by Joe Chin


KUALA LUMPUR: RAM Ratings has placed the A1/P1 ratings of Dreamgate Corporation Berhad’s RM200 million Commercial Papers/Medium-Term Notes Programmes (2007/2014) on Rating Watch, with a negative oulook.

The rating agency said on March 4 the Rating Watch reflects RAM Ratings’ concerns about the adverse impact of the recent changes in Cambodia’s gambling regulations, which are expected to have negative implications on Dreamgate’s credit profile.

Most of Dreamgate’s profit-generating technical support and management Services (TSM) concessions are located in Cambodia (as of end-2008, some 79% of its concessions were positioned in that country.)

RAM Ratings said it understood that the Cambodian government has issued directives banning its citizens from gambling.

At the same time, slot operators have been asked to remove gaming machines from entertainment clubs by June 2009. This means that all slot machines can only be located in licensed casinos and hotels.

About 1,500 of Dreamgate’s slot machines (or 30% of its devices installed in Cambodia) are affected by the ruling.

On top of that, another 1,900 of Dreamgate’s slot machines in Cambodia have been affected by a more recent directive issued in February 2009.

Now, even slot machines in Cambodian hotels are required to temporarily cease operations, pending a full review of their licences and compliance with the earlier directive.

“We understand that the management plans to relocate the initially affected 1,500 machines to Macau, the Philippines and other casinos under the Group’s stable in Cambodia; the exercise is expected to be completed by mid-2009. On the other hand, the fate of the other 1,900 machines remains uncertain at this juncture,” it said.

RAM Ratings said Dreamgate might consider relocating these machines to Macau and the Philippines as well, if the licence review stretches more than two months.

In 4Q FY Dec 2008, Dreamgate incurred a pre-tax loss of RM9.48 million, due to various factors that include slowing TSM sales, write-off of expenses in relation to club closures and higher operating costs arising from additional outlets; before the regulatory changes, Dreamgate had added 12 new outlets in fiscal 2008.

Given these disruptions to its Cambodian operations, the Group’s performance in FY Dec 2009 is likely to come under severe pressure.

“RAM Ratings is concerned about Dreamgate’s position going forward. Given these rulings, we opine that the Group’s businesses in Cambodia are unlikely to yield the same returns as before.

While we note that Dreamgate will be moving these machines to new TSM concessions in Macau and the Philippines, its TSM presence in these countries is still relatively small,” says Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

RAM Ratings said it was monitoring the developments vis-à-vis Dreamgate, and keeping in close contact with the management in the lead-up to our annual review of its ratings.

The ratings will remain on Rating Watch until the review is completed; this is expected within the next three months.