RUN to the JUNGLE
February 20, 2012
While few Asian nations seem to desire commercial gaming on the size and scale of Macau, many seem to have taken a shine to the type of casino development finding success in Singapore—integrated resorts (IR) complete with gaming, multiple hotel brands and meetings, incentives, conference and exhibition (MICE) facilities, designed to attract cross-border customers and international investors.
For any of the aspiring Asian gaming jurisdictions to succeed in the IR trade, they will need to compete not only in terms of gaming revenue but in terms of regional attraction to consumers and in terms of rate of return on investment for backers. On those points what matters is not simply who is first to put something up. What counts for a sustainable IR industry is who has the best transport infrastructure, the best quality of execution and management, and the most transparent regulatory and governmental system—including competitive tax rates.
When judged by those criteria, other jurisdictions that haven’t yet completed IRs but are on the road to doing so—or are talking a good game on the topic—must be taken as serious contenders. This list of nations includes The Philippines, Japan, South Korea and Taiwan.
But it’s the mainland Southeast Asian nations—commonly referred to as Indochina—that appear to have grasped the IR concept most eagerly. Indeed, both Cambodia and Vietnam have already broken ground on massive casino/tourism centers. Even recently liberalized Myanmar is reportedly exploring casino resort development. Each of the Indochina jurisdictions holds promise for IR developers if potential obstacles can be successfully navigated.
When completed, the Ho Tram Strip will include multiple casinos and a wide variety of resort and MICE amenities, all designed to attract tourist and business dollars.
The Ho Tram Strip is prime beachfront property located in South Vietnam around 120 kilometers north of Ho Chi Minh City and its population of 10 million—though as the law currently stands Vietnamese nationals will not be allowed to use the casino facilities unless they hold foreign passports. Still, Ho Chi Minh City and Vietnam attract upwards of five million visitors a year, and the promise of this location attracted the backing, brand-power and marketing support of a major international operator—MGM Resorts International, which will open MGM Grand Ho Tram as part of phase one development.
ACDL also has other backers. A syndicate of Vietnamese banks is providing the debt. The equity is coming from New York based Harbinger Capital Partners; the U.S. regional casino operator Pinnacle Entertainment which in May took a 26 percent stake for $95 million; and from a recent private offering that raised $237.4 million according to a September 2011 filing with the U.S. Securities and Exchange Commission. Subscribers listed for the private offering included Lloyd Nathan, CEO of ACDL (and former president of Global Gaming Development for MGM MIRAGE), and Anthony Sanfilippo, a director of ACDL and the chairman and CEO of Pinnacle.
The aforementioned MGM Grand Ho Tram will be the first of five planned resorts to be developed along the coastal strip by ACDL and its partners. MGM Grand Ho Tram will feature a 13,600-square-meter casino with 90 live table games and 500 electronic games, as well as a five-star hotel with 541 rooms. The tax rate for the property is uncertain, but reports believe it will be approximately 30 percent for mass-market play and 14 percent for the VIP trade.
The second phase of MGM Grand Ho Tram will see a further 500 electronic games added to the casino offer, another 559 hotel rooms and villas, plus a full range of retail, dining and conference facilities. There will also be an 18-hole golf course designed by champion golfer Greg Norman.
Under the terms of its agreement with ACDL, Pinnacle will enter into a management agreement through 2058 (with the potential for a 20-year extension) for the second integrated resort of the Ho Tram Strip. This IR will be similar in scope to the one currently being developed by MGM Resorts.
“Our investment in ACDL and long-term management agreement for the second integrated resort bring meaningful strategic benefits to Pinnacle, including further diversification and potentially very significant returns on invested capital,” said Anthony Sanfilippo, president and CEO of Pinnacle Entertainment, in a statement released when the deal was first announced this past summer.
There is talk about two other consortia building two further IRs in Vietnam; one on the central coast near Da Nang, and another on the northern coast at Halong Bay. So far there’s been no action.
So although there’s no clarity yet on whether the Vietnamese government is going to open up the market to domestic players, it does seem that the Ho Tram Strip will be the only IR project within the country for at least several years to come.
WORLD OF PROMISE
Thanks to attractions such as Angkor Wat, Cambodia tourism is up 14 percent, a fact not lost on casino resort developers.
That exclusivity is due to last until 2065, but it’s not clear just how cast-iron that exclusivity deal will prove to be. Hun Sen, the incumbent prime minister of Cambodia who approved it, will be 113 years old by the time the agreement expires. And Cambodia has a turbulent political history to put it mildly.
But NagaCorp, founded by Malaysian businessman Chen Lip Keong, does have a seemingly robust business model as well as some friends in high places. Aside from long-term exclusivity, the principles are: low capital and labor costs relative to the region; and a market positioning that is carefully pitched. That equates to player check-in limits of around $25,000—way below the stratospheric levels of credit-fuelled VIP roll seen in Macau casinos’ high roller rooms (thereby avoiding the worst extremes of baccarat hold volatility). But it also means a quality of customer and probity of business practice well above the cheap-and-not-so cheerful gambling operations seen in some of Cambodia’s border casinos.
NagaWorld isn’t currently a ‘true’ integrated resort. It doesn’t yet have a shopping mall.
Changes are coming soon, however. In June NagaCorp announced a deal with its founder, CEO and majority shareholder Dr Chen to expand its facilities. Within a three- to five-year period, he will develop two projects next to NagaWorld—NagaCity Walk, a two-level pedestrian mall linked to the existing site, plus a complex including hotel rooms, more shops, and more convention facilities. The combined development costs are expected to be $369 million. On completion, Naga will acquire the buildings from Dr Chen, and give him shares or convertible bonds to the capital value of the project. After conversion of the instrument issued to Dr Chen, minority shareholders in NagaCorp will be diluted by approximately 42 percent, though analysts point out that shareholder dilution should be quickly offset by increased earnings generated from the new project.
Union Gaming said in a note to investors that the 7,300 square meters of extra gaming space allocated to NagaWorld should accommodate between 200 to 250 table games and 500 to 600 slots. Union Gaming estimated NagaWorld’s gaming revenues in 2011 from its existing facilities would be $217 million, less third-party slot operator fees.
Citi Equities said in an August report that NagaCorp had a fixed monthly tax of $292,000 in 2010, growing by 12 percent per year through to 2013. Citi added this equated to an estimated effective tax rate of 5 percent for 2011.
Another piece of positive news is that the number of international tourists to Cambodia is on the rise. In the first quarter of 2011, Cambodia’s Ministry of Tourism reported a 13.9 percent increase in international visitors year-on-year. Around 735,000 of the arrivals (94 percent of the total) were related to leisure travel.
Nations across Asia hope to emulate the success that Singapore has had with its integrated gaming facilities.
Now, fewer than four years later, Myanmar is being talked about as the next Asian tiger economy, with opportunities to build a significant mainstream casino industry.
Myanmar already has casinos—eight on the border with Thailand and a handful on the border with China. But they are generally gambling halls with a few hotel rooms aimed at the nationals of Thailand and mainland China—where casino gambling is not legally permitted. Those establishments only survive due to the personal patronage of members of the Myanmar government—in return for a percentage of the action. It’s a big leap of the imagination to go from that to modern integrated casino resorts.
Yet the idea may not be so far-fetched. It’s not impossible that a rejuvenated Myanmar, with a popularly-elected government and reintegrated into the family of nations, could become a holiday playground for the newly-rich of China and India. It shares land borders with both and has been a trading partner for the two great civilizations for centuries. India and China both avoided getting dragged in to the West’s sanctions gesture and have continued to trade with Myanmar during the diplomatic crisis that followed the 2007 crackdown.
“The mainland Chinese are already in there in droves,” said Ben Lee of Macau-based iGamix Management and Consultancy, who recently guided some Asian investors on a trip to the country to investigate gaming investment opportunities in the main cities there. “But this year the number of European visitors has actually increased—in particular the number of Germans. A couple of the big German tour organizers have started taking customers there, as have the Japanese.”
An important question from Western casino investors’ perspective is whether a future Myanmar government would pass enabling legislation to make casino gambling an officially-sanctioned industry.
Most sophisticated casino investors seem to have a couple of reactions to the ‘Myanmar spring’ notion. The first is to point out that if indeed an economic and political thaw has set in, it’s still very early days. No one is likely to invest integrated resort-style amounts of cash into a casino project until it’s clearer where the country is heading, legally- and politically-speaking.
The second is that the Western casino brands won’t be able to touch the place— at least officially—until Western sanctions are lifted.
“The people who would be comfortable with Myanmar as it currently is are predominantly Asian entrepreneurs who don’t have to adhere to economic sanctions the way American or European investors have to,” Lee said. “The people I was working with aren’t looking at the border casinos. They’re looking at hotels in cities like Yangon and Mandalay with a view to purchasing, improving and refurbishing the infrastructure, and putting a gaming operation inside—provided the properties get the necessary permission from the authorities.”
Information for this article was reprinted and excerpted with permission from Inside Asia Gaming magazine. Editing and additional reporting was provided by Paul Doocey.
SIDEBAR: Seeking integration
Here’s a rundown of other Asian nations fostering integrated casino expansion:
THE PHILIPPINES—Actually, the Philippines already has an integrated casino resort—Resorts World Manila, conveniently situated across the road from the capital’s international airport. Even better, one of the partners in this joint venture is an internationally-proven casino operator—Malaysia’s Genting Berhad via its Genting Hong Kong unit. Resorts World Manila is a $700 million, 50:50 joint venture between two listed companies—Genting Hong Kong (quoted on the Singapore market) and Philippines developer Alliance Global Group (listed on the Manila exchange). Genting Hong Kong—formerly known as Star Cruises—also operates casino cruise ships out of Hong Kong and other ports in the Asia Pacific region.
Other potential Philippines IR opportunities are on the horizon. A joint venture IR—Belle Grande Manila Bay between local companies Leisure and Resorts World Corp and Belle Corp, and with a reported price tag of $750 million—is currently under construction in Manila. A third resort—possibly with investment from Aruze Corp, the gaming company founded by pachinko machine maker and Wynn Resorts Vice Chairman Kazuo Okada—has also been proposed for the Manila Bay area.
The Philippines offers gaming tax rates (25 percent on the ‘grind’ or mass market and 15 percent on the VIP, plus 2 percent levied in both cases on restoration of cultural heritage) that are lower than Macau’s 39 percent across the board fees. The rates are still a little higher than Singapore’s applicable tax of 22 percent on the mass and 12 percent on the high roller segment (inclusive of gaming tax and goods & services tax).
JAPAN—The August appointment of Japan’s sixth prime minister in five years is unlikely to derail plans for legalization of casinos in the country claims Tokyo-based consultancy Gaming Capital Management (GCM). Time will tell.
On the plus side, Japan’s current economic difficulties—compounded by the natural and nuclear disasters in the northeast of the country in March—seem to have pumped up the normally flaccid political will of lawmakers. They and their advisors are now starting to put some administrative flesh on the bones of Japan’s draft Casino Bill. Among the details disclosed so far by a cross-party association of lawmakers and experts are:
• At least one IR may be located in the Tohoku region—the northeast part of the main island of Honshu worst affected by the earthquake, tsunami and subsequent nuclear accident.
• For the first few years of casino operations the government’s tax revenue from the industry will contribute to the earthquake recovery plan, although tax rates are still to be decided.
• The costs of industry regulation will be borne by the casino operators.
• An entry fee will be charged to pay for gambling dependence prevention; and for regional development measures.
• Casino entry will be controlled via a system of identity checks. Policy on how to prevent fraudulent entry of barred persons or the entry of criminals using aliases is still to be developed.
• The necessary amendments to Japan’s Criminal Code required for legalization of casino gambling will be the responsibility of the Ministry of Justice.
TAIWAN—Taiwan’s Ministry of Transportation and Communications (MOTC)—which oversees the country’s Tourism Bureau—released its draft casino legislation last April. The good news for overseas operators and investors is that the draft bill for casino regulation envisages the casinos as being part of large-scale IRs built on the islands of Penghu, Matsu and Kinmen, with the winning bidders for the two licenses selected largely on the basis of their investment commitments and previous experience of developing successful gaming resorts. The successful bidders will also get a good run at the market. After the two permits are awarded, there will be a 10-year moratorium on the awarding of any more. And the license period will be 30 years. The not-so good news is that the bidders will have to pay an upfront franchise fee of $97.8 million plus a license fee of $7 million million for every three years of operation.
The operators are expected to face a gaming tax rate (excluding corporate tax and other fees) of 12 percent-15 percent.
Residents of Penghu, Matsu and Kinmen must vote in favor of casino expansion before the bidding can proceed. Previous gaming referendums failed to win islander support.
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