Dreamgate's Potential

The principal activities of Dreamgate are manufacturing, refurbishment, technical support, and maintenance, sales and marketing of gaming and amusement machines and equipment, sales and marketing of security surveillance products and systems, renting of property and investment holding. Dreamgate is one of the ten companies, which are given the licensed by the government to deal in gaming machines and equipment in Malaysia. Those equipments for table games produced and supplied to the gaming industry are such as roulette, blackjack, baccarat, poker and Pai Kow. In addition, it also produces gaming accessories like, dice chips, playing cards, card shuffle devices etc. Meanwhile, it also produces amusement machines and equipment to theme parks, amusement arcades, clubhouses and other entertainment centres. Dreamgate supplied its products locally and as well as to countries like, Thailand, Cambodia, Vietnam, Macau SAR, Singapore, Nepal, South Korea, Philippines, Myanmar, India and Laos.

Revenue from 2004 to 2006 were RM115.3m, RM154.1m and RM215.4m respectively. Operating profit over the same period were RM18.3m, RM29.7m and RM37.3m respectively. Net margins f0r the 3 years were 15.8%, 18% and 14.6% respectively. Revenue is expected to grow by 8% in 2007. The jump in 2005 and 2006 was helped by the sharp jump in gaming business in Cambodia and Macau. What is interesting is the business model has shifted from being a pure manufacturing concern to one where they have a revenue share model via TSM division. Dreamgate's attraction rose significantly via its 40% stake in a casino in Bavet, Cambodia. Similar strategies will be employed for TSM operations in Camodia and the Philippines.

Upcoming catalysts include the 2-for-1 bonus and its transfer to the Main Board (a very significant move for a Mesdaq stock). Balance sheet wise its gearing is only 0.25x with an enviable cash flow per share of around 25 sen per share. The business model is improving and its ROE for the last 3 years averaged at around 28%, while its PER is nearing 11x 2007 earnings. A rerating upwards should come soon.

Dreamgate also participated in he recent Asian Gaming Expo where presenters include Las Vegas Sands, Melco (HK), Genting, E-Sun (HK), Aristocrat (Aus) and Galaxy (HK). New products by RGB (pat of Dreamgate) garnered good response from the participants. The expo also helped propel Dreamgate's presence among the Asian gaming players. Quietly Dreamgate has carved a 30% market share in Asia for the gaming slots products they produce.

Some caveat here on the 40% stake in Bavet casino. The other 60% is held by 3 Cambodians, and they are responsible for securing the licenses, permits and approvals for the casino opeations. Dreamgate's investment is just a paltry RM20.4m. Of the total, more than 80% will be spent on land acquisition, construction cost and equipment. The IRR is a stupendous 40% but as the picture is painted, there are obvious execution risk. In addition, Dreamgate has alo taken a 70% stake in Mekong Recreation Club, similar execution risks involved. Nonetheless, they are catalysts and the share prices have not gone ballistic yet on "hype". Back in April 2007, Dreamgate has proposed to issue a seven-year RM200 million worth of commercial papers (CP) and/or medium term notes (MTN) programme to refinance its existing borrowings, for working capital and investment purposes. The bond was approved in May 200. Company is scaling its operations, the business model is attractive even though its Cambodia (where else can you get some action for gaming??).

In 2006 the company sold 1,860 slot macines and is on target to reach 2,250 this year. The share price has eased back to below RM1.60 and steady collection is evident as the share price did not collapse with the 100 points drop in KLCI. 2-for-1 bonus coming up and a transfer to Main Board. Looks good for a buy and hold for the exercise. One of the very few shares worth picking up despite the current market turmoil.