WOW! HERE ARE THE NOTES FROM THE MEETING...
(From Blakkd)
Here are my notes from the investor presentation today (3:00 PM at Bankers Hall Auditorium in Calgary, Alberta). It's quite lengthy but interesting (I hope).
There were only ~25 people in attendance. I have no idea if they were large/small brokers, analysts, investors.... They showed a ½ hour video about the company which was used last year when they did their financing. It told how they put their company together – influential Board of Directors; local (Canadian) credibility first; establish technology partners (AWI, Motorola, Powerhouse); establish international relationships (Vietnam). It took them 5 years to get where they are today à it's a slow process to start, but once the first lottery is up and running, success will breed credibility and further success.
David Aftergood (Pres. & CEO) and Spence Bozak (Corp. Development) answered questions after the video. Another fellow (Mark something - I forget his last name – was there from the finance side). David really impressed us (I was there with 2 friends and fellow AGC investors) as a man who had done his homework on “how to do business in eastern Asian countries”.
Applied's AGM is on June 23 (I didn't ask where) and the Annual Reports and proxies are in the mail. Should be getting them soon. AGS has approx. 16 million shares (didn't ask if that was outstanding or fully diluted, sorry, but the Annual Report should tell) with 8 - 9 million held by insiders (over 50% !!!) and 7 – 8 million publicly held by 1600 registered shareholders. This is a very large shareholder base considering the young stage of the company à averages out to only 5000 shares per shareholder!!
The big question, of course, was “when will the first ticket be printed?” David's answer was “Soon.” He refused to be pinned down to a specific date because it is somewhat out of his control. As we have all heard and read, the Hanoi officials are arranging an opening ceremony and trying to coordinate local and Canadian officials and dignitaries. What he did say was that he expected to be selling both the daily and the weekly draw tickets before the end of June.
David said that they (AGS) are >90% finished testing the system and emphasized and re-emphasized the critical importance of the system running absolutely bug free from day one (that is why this testing period has dragged out a bit longer than anticipated). He said it is crucial that things run without a single hitch so that the next deal(s) are that much easier to land. Governments hate risk taking.
David also confirmed the story that voltage (surge) protectors have to be installed on all terminals (the local power supply company does not have that technology built in and the equipment must be protected à see the above comments on 100% bug free operations). AGS has the parts they need in Bangkok ready to go, but the Vietnam government wants to use a local supplier. David said their electricians have looked at the local parts and it shouldn't be a problem. The real key is the “ribbon cutting” ceremony being arranged by the Hanoi government, AGS is really at their mercy.
Hanoi was chosen by the Viet government as the pilot city because it's the capital city – much like Canada choosing Ottawa – even though there are larger cities with much larger revenue potential. AGS said that Hanoi was particularly difficult to install the terminals because the telecommunications equipment (phone lines etc.) is old Russian technology. Ho Chi Minh City (HCMC) will be much quicker and easier as it has U.S. and French technology. Hanoi was a true test.
Here is one of the many exciting points I learned. The Vietnam government has passed legislation stating that there will only be one (yes, ONE) lottery system in the country. Guess who that company will be??!! On top of that, if Hanoi is successful (which it will be), they want an on-line lottery system across the country as soon as possible (within one year David said). AGS already has a Memorandum of Understanding (MOU) in place with HCMC. AGS fully expects a final agreement to be signed within days of Hanoi ticket sales commencing and they anticipate starting contruction/installation by 4th quarter 1999 with revenues starting in 2000. They also expect MOU's to be signed with two more major Viet cities (can't remember the names) after HCMC.
The on-line lottery will replace the existing manual paper lottery which is subject to black market corruption, multiple tickets with the same numbers and lottery money ending up in non-government hands. The government has seen lottery revenues shrinking every year as people stop playing them and lotteries are a HUGE revenue source (there is no income tax in Vietnam). They are very anxious to get a reliable, trustworthy system in place to restore the revenue stream.
Speaking of revenue, what we all really want to know is “what's in it for AGS?” AGS has publicly stated that they project net revenues of $40 million over the 7 year life of the Hanoi deal (remember they get 4% of gross revenues for the first 5 years, the 1% for year 6 and year 7). Davis said they are projecting $1.5 to $2.0 million for the partial year 1999 and $5 to $6 million for 2000. $5,000,000 / 16,000,000 shares = $0.30/share. Multiply that by a trading multiple of 10-20 and you get $3-$6/share, 3-4 times where we are now.
Not only is this JUST for Hanoi, but is a very conservative estimate. They look at lottery sales on a $/day/terminal basis. A “typical” North American (South Dakota, David said) sales rate is $2000/day/terminal. Sales in Singapore (one of only 3 Asian countries with an on-line lottery) can be up to $90,000/day/terminal!! AGS has based their estimates on the very conservative $2000/day/terminal initial sales. According to David they have 300 terminals installed in Hanoi and they net revenues are (initially) around 50% of gross revenues. In other words, for the second half of 1999: $2000/day/terminal x 300 terminals x 180 days x 4% (AGS share) x 50% (net of expenses) = $2.1 million.
To get an upside estimate take the above revenue number, divide by $2000 and multiply by $90,000. WOW!!! Even if it's somewhere in between the two, WOW!!!
And that's just for Hanoi. HCMC, as we all have heard, is estimated at 4-5 times the revenue potential of Hanoi. At this point AGS does not know for sure what the terms of the HCMC agreement will be but they expect it to be similar or identical to the Hanoi deal. Mr. Aftergood's estimate of net revenues (i.e. AGS's net share after expenses) for Hanoi and HCMC, assuming a similar 7 year deal, was $150 million NET (versus the $40 for Hanoi alone). Even assuming this $150 million is evenly split over 7 years (there would actually be much more in the first 4 years), that gives $21 million net revenue on 16 million shares (assuming no further equity issue) or $1.34/share net revenue. Multiply that by a 10 to 20 trading multiple and see what you get!!
One further point. As I write this (late at night!) I'm not even sure if the $ figures above are $US or $CDN. I would think they are $US as David often quoted in $US (eg. the prize money I describe below). That may add 50% to the projections in Canuck bucks.
Just out of interest, someone asked David what the tickets cost to purchase in Vietnam and what the prizes will be. Both the current paper lottery and the on-line lottery tickets will sell for the equivalent of $0.40 US. Current prize money is only $5000 US and is subject to forgery, fraud etc. On-line prize money will be approx. (depends on ticket sales, much like our own 6/49) $25,000 US for the daily draw and $100,000 US for the weekly draw. Five to twenty times the potential prize money and a clean system à this is what the big media/advertising campaign is all about that is currently under way. The government wants to inform and assure the people that the prizes are significant and that the system is clean. David said there have already been line-ups at terminals with anxious customers. Incidentally, the Viet government is paying for all of the advertising.
So the basic plan of attack is this: (1) Get Hanoi up and running and revenues coming in. (2) Ink the final agreement with HCMC. (3) Sign 1 or 2 more MOE's with other major cities (as “recommended” by the government). (4) Do a financing (I heard $10 million mentioned but don't quote me) to help finance the HCMC construction. (5) Get HCMC installed and operational by early in the new year. Then the other cities and so on. I got the impression that the first 4 items should happen fairly quickly (within 3-4 months). With any luck that $10 million financing will only require a 1-2 million share issue!!! ;-)
Another topic, which we discussed with David after most people had left, is an AGS buyout. This was rumored on the net a couple of weeks ago. David's opinion is that the chance of someone buying AGS is quite remote, for two reasons. One is that over 50% of the shares are held by insiders. Second is that the Vietnam government is not going to do business with just anybody, especially not a US company - they must have some history there!!! ;-) AGS spent 5 years nurturing their relationship with the Vietnamese and not just anybody can waltz in there and take over, they'd be told to take a hike. David feels quite secure in AGS's “built in” poison pill.
Final topic is local media coverage. Bottom line is that David feels AGS has all the right connections in national media (Post, Globe, CBC, etc. etc.) to blow their horn once ticket sales begin. Coverage is simply waiting on, like the rest of us, the first ticket sales.
That's about it. Sorry it was so long winded but there was oodles of great information to share. I was long AGC this morning, now I am LOOOOOOOOOONNNNNNNNGGGGGGGG, very long. I think great things are ahead. I plan to make the AGM on June 23, hopefully revenues are flowing in by then.
If anyone has any questions I would be pleased to try and answer them. And if any of my rough calculations above look out to lunch, by all means correct me.
KDB |
