Excerpted from Inside Asian Gaming magazine with additional reporting, writing and editing from Paul Doocey.

It must be hard for Asian nations to look at the runaway success of the nascent gaming industries in Macau and Singapore without some slight mixture of envy and remorse—envy for jobs, tourism and the billions in tax revenue the gaming resorts in these enclaves regularly generate; remorse that they were unable to establish large-scale commercial gaming first.

Macau’s relatively quick rise to casino prominence has been well documented. In the past decade, Macau has grown to become the world’s largest single commercial casino market in terms of combined gross revenue (CGR), its 38 gaming facilities generating $38 billion in 2012, a 13.5 percent increase over the previous year, according to Macau’s Gaming Inspection and Coordination Bureau. To put this number in perspective, The U.S. commercial gaming industry generated combined 2012 gaming revenue of $37.34, roughly 2 percent below what the tiny Chinese enclave produced over the same time period.

So far, 2013 appears to be another bumper year for Macau casinos, which have a CGR of more than $25 billion for the first six months. And, buoyed by a record-setting summer, Macau gaming growth shows little sign of abating. In June, Macau casinos generated $3.5 billion in CGR, 21 percent above the same period in 2012. July results were just as impressive—$3.7 billion, up 20 percent over last year’s figures. August CGR was also trending up for Macau casinos, with some analysts predicting the final results would be 18 percent to 19 percent higher than 2012.

With results like this, it’s easy for analysts to predict another record-setting revenue year for the enclave.

“While recent economic and financial indicators raise concerns regarding the health of [China’s]economy, the Macau gaming sector remains unscathed,” said John Kempf, an analyst for RBC Capital Markets, in a July note to investors. “We do not mean to imply that this will last forever; but we would point to similarities with the strong growth of the U.S. gaming market versus overall GDP during the 1990s and early 2000s. Demand remains much stronger than supply, and vast areas of China’s population remains under penetrated to gaming in Macau.

“We are increasing our 2013 growth estimate for Macau gaming revenues to 13.0 percent from 11.1 percent. Our 10.8 percent estimate for the second half assumes that growth will taper off a bit from the 15.3 percent growth rate in the first half of 2013, as comparisons become more difficult. Still, our new monthly growth rates reflect the upside of recent hotel capacity supply and infrastructure improvements.”

Meanwhile, Singapore took a slightly different casino regulatory path then Macau—opting to restrict casino development to two massive integrated gaming resorts (IGR); which were eventually awarded to Genting Singapore, which opened Resorts World Sentosa in February 2010, and Las Vegas Sands, which unveiled Marina Bay Sands in April 2010. The properties were an immediate success, generating an average of $1.2 billion in quarterly gaming revenue and producing combined yearly revenue of $5.85 billion in 2012.

Part of the reason Macau and Singapore have generated such returns is that they operate in something of a vacuum—while commercial casino gaming exists throughout the Far East, few nations have the density of gaming facilities present in Macau, or the size and hotel capacity of Singapore’s integrated resorts. The situation is somewhat akin to the United States in the 1980s, when full-scale casino resort gaming was confined to Nevada and Atlantic City, N.J., and each of these territories reaped millions of dollars in gaming and tax revenues from nearby states. The eventual response from these communities was to initiate their own gaming industries, thereby keeping casino jobs and revenues within their borders. Today, 49 of the 50 U.S. states have some form of commercial or tribal casino gaming.

Will Asian nations follow this same path when it comes to large-scale casino resort development? Well, it definitely appears to be trending that way, with a number of countries looking to boost existing casino industries with the addition of Singapore-style integrated resort development (see sidebar). 

The latest nation to attempt full-scale casino resort development is Vietnam, where The Grand, the first of multiple casino resort properties planned for the Ho Tram Strip along Vietnam’s South China Sea coast, opened in late July. In many ways, the story behind The Grand-Ho Tram shows the promise and the peril other Asian nations will likely face developing the types of properties needed to compete with Macau and Singapore for the lucrative regional casino customer.

Sidebar: Full Resorts ahead . . .

Vietnam is not the only Asian nation going forward with plans to development large-scale integrated gaming resorts. Here is a quick rundown of some other locales:

• Australia: Tony Fung, billionaire scion of one of Hong Kong’s best-known banking families,  has proposed  a $3.8 billion gaming and entertainment mini-city called Aquis Resort at the Great Barrier Reef, a “man-made wonder of the world,” as he describes it, that would dwarf anything they’ve ever seen Down Under.

He’s purchased an option through a local company he controls on about 300 hectares of farmland some 13 kilometers north of Cairns in a seaside hamlet called Yorkeys Knob. Here he wants to build five hotels totaling 3,750 rooms, 1,335 apartments and luxury villas, a golf course, a 25,000-seat sports stadium, two additional theaters, 13,500 square meters of high-end retail, a lake and a reef lagoon and one of the world’s largest aquariums. Its opening is scheduled for some time in 2018.

The “international class” casino designed to target wealthy Chinese would initially house 750 table games and 1,500 slot machines.

• The Philippines: Casino resort development continues apace in and around the capitol of Manila and at Entertainment City. Next summer should see the opening of Belle Corp.’s $1.3 billion Belle Grande Manila Bay, operated by Melco Crown Entertainment. Also around that time, the recently-opened Solaire Resort & Casino should have its next phase completed with 300 more rooms and suites, 5,600 square meters of retail, a showroom, convention and meeting space and a luxury spa. Travellers International Hotel Group, the Megaworld-Genting Hong Kong joint venture behind Resorts World Manila, is also licensed to build at Entertainment City and plans to open its $1.2 billion Resorts World Bayshore in 2016.

• Malaysia: Casino de Genting, once the region’s largest gambling venue, located north of Kuala Lumpur in a mountaintop resort called Genting Highlands (also known as Resorts World Genting), will be revamped at a cost of $937 million and expanded by 1,300 hotel rooms. The plan, slated for completion in 2016, includes a joint venture with 21st Century Fox to develop a 25-acre movie-themed amusement park that will feature more than 25 rides and attractions based on Fox film brands.

OPEN ATTITUDE

The house was packed and sizzling with excitement on the night of July 26 for the ribbon-cutting to mark the long-awaited opening of The Grand – Ho Tram Strip.

It was a remarkable event for a lot of reasons. The presence of U.S. hedge fund titan Phil Falcone was a bit of a surprise, but then it’s Harbinger Capital that put up most of the $500 million to get the place off the ground.

It was remarkable for who wasn’t there as well. Dialing back just six months ago you would have expected to see more than a few heavyweights from MGM Resorts International mingling with the junketeers and their well-heeled clients and the rest of the glitterati in their dinner jackets and gowns—a beaming Jim Murren himself in all likelihood.

Instead it was Robert Wolfe who strode onto the stage, the tall, bespectacled chairman of Asian Coast Development (Canada) Limited (ACDL), the Vancouver, Canada-based owners of this beautiful beachfront resort on Vietnam’s South China Sea coast. He looked exhilarated. He looked tired. Doubts have stalked Ho Tram since its inception. There are many who still question its viability, especially after MGM pulled out earlier this year as the resort’s operator. Wolfe knows about all this of course. He spoke to the crowd of what an “amazing ride” it’s been. “What has been accomplished here has been unprecedented in Vietnam,” he said. “We are making history here tonight.”

The Grand – Ho Tram has battled its share of obstacles to become Vietnam’s largest casino resort, really the first fully integrated resort in the country and the largest in the ASEAN world outside Singapore. It weathered the global financial crisis of 2008-2009. It has overcome funding issues. In the second half of last year certain completion deadlines were missed. Nothing uncommon perhaps when you’re trying to get a very big hotel with a casino and restaurants and all the rest built. But in an uncommon environment like Vietnam that can spell headaches. The government withheld the necessary investment certificate, which triggered a syndicate of Vietnamese banks to suspend the undrawn portion of the project’s credit facility. That was enough to move NYSE-listed Pinnacle Entertainment to announce that it was writing off its 23 percent stake.

While all this was going on, the relationship with CEO Lloyd Nathan was disintegrating. Then 2013 arrived and a planned Lunar New Year opening came and went. Nathan, who had been with the project since 2010, was gone not long after. He claims he was forced out, and he’s suing Wolfe, Falcone and Pinnacle CEO Anthony Sanfilippo.

In March, MGM jumped ship. Maybe it was the investment certificate; maybe it was the problems with Nathan, an admired former executive who at one time had headed the gaming giant’s global development arm, maybe both. At any rate, before the investment certificate finally came through in April it wasn’t looking good. The July opening wasn’t announced until June.

“There were many people who probably thought it might never happen,” said COO Mike Santangelo, who was brought on in March from The Cosmopolitan on the Las Vegas Strip, where he was vice president of finance.

Wolfe will tell you The Grand’s troubles are behind it and the financial ground beneath it is solid. “I’m not going to give you the mix of our senior bank versus equity,” he said, “but we are heavily balanced toward equity in our structure. We’re far from over-levered. We have considerable room on our senior debt. We have ongoing dialogue with our banks about how we can expand, and our equity investors have provided commitments for additional capital to build out the rest of this project and into our next phase.”

Construction began on that next phase last fall. Plans call for 559 hotel rooms and 14 luxury villas to open in 2017 along with a second casino that will bring the gaming complement to Vietnam’s legal limit of 180 live tables and 2,000 slots and EGMs. Pinnacle will be the operator.

There’s a lot of room to play with beyond that. The 164-hectare site is configured for three more hotels or some variation, possibly involving a high-end residential and/or luxury time-share component.

Critical mass will be ACDL’s answer to the government’s ban on casino gambling by its own citizens and the challenge of being a good two to three hours’ drive through the congested port lands of Ho Chi Minh City from the only international airport in the south of the country. Nor does it enjoy the proximity to China of its smaller competitors in the resort hotels in Da Nang and up on picturesque Halong Bay and the border casinos in the northeast and above Hanoi in the far northwest.

If it can work through all this, though, it has the product to capture an outsized share of a tourism market that currently exceeds 4 million leisure travelers a year. International arrivals to Vietnam were up 14 percent in 2012 to almost 7 million visitors across all categories. The government expects that to reach 10 million by 2020.

 

RESORT EXPERIENCE

What is true of The Grand at this point is that you can drive three hours or you can drive for a day, there is nothing at the end of any road in Vietnam to compare with it. Nestled amid gently rolling hills and protected forest, it straddles one of the prettiest beaches in the country. Its heart lies in the Club Med ambiance of its outdoor pool area, where you can lounge in a cabana or saunter up to the bar for a glass of something with an umbrella in it or stroll down to the beach to watch the surfers and kayakers and parasailers. It’s carried throughout the property in the warmth of the Steelman Partners design—spacious, airy, basking in natural light—and in the restaurants and the world-class spa.

The Grand takes you up in a relaxed embrace. It’s a feel that distinguishes it from much of Asia’s current resort gaming product. There aren’t many in the world that it doesn’t surpass on this level. It’s the anti-Macau, if you will, equipped, as few casinos anywhere are, for long, lazy holidays.

The hotel offers an elegantly outfitted standard room with all the extras you’d expect with five stars and some you might not, like full-length windows that open onto a Juliette balcony—and whether you’re looking out over a sliver of azure sea or the flapping roofs of the cabanas or the golf course that opens later this year, there isn’t a view that isn’t delightful.

The casino is bright, friendly, and intelligent. The air is cleansed by an innovative baseboard A/C system. The floor is a breeze to navigate. The product is diverse and spread across a mix of live tables and the latest slots and electronic table games in circular and stadium configurations. It’s also the first all-G2S floor on the continent, built on IGT’s sbX technology, which enables the open Game-to-System architecture and allows IGT’s Service Window to be fitted onto every one of the floor’s 614 machines.

It’s state-of-the-art stuff. “It’s the one thing I’m most proud of,” said Ian Garner, who joined The Grand as vice president of slot operations from The Venetian Macao, where he was director of slots. “We’ve got [Service Window] running on every single vendor. They all really stepped up to make this happen.”

The system also includes IGT’s Table Manager solution and its newly released Rebates and Commission module developed specifically for the Asian junket market.

This is significant because, with no recourse to domestic players, management is looking to the region’s whales to drive gaming revenue. Currently, 55 of the property’s 90 tables are baccarat assigned to the VIP salons. Fortunately, the tax structure is not unfavorable. It’s comprised of two parts: 10 percent VAT and a 25 percent “special services tax” which is a tax on revenue for all intents and purposes. Incentives to junkets are deductible, however—a “discount on stipulated currency,” as its officially termed—so after discounting rolling-chip sales the effective blended rate—“our net tax position,” as Santangelo calls it—is in the low to mid-teens.

“That’s why we can offer a little better incentive to our international tour operators, and that’s why they’re going to bring their players here,” he said.

He’s led dozens of junketeers and promoters through the property, he said—from Macau, mainland China, Japan, South Korea and Singapore—and 10 had been signed to partnerships as of opening day (“international tour operators” is the preferred euphemism) and three more looked to be coming on. “People are calling us, versus us going out hunting them down. It’s been quite exciting for us,” Santangelo said.

And if the government was ever to relent in its opposition to domestic play? “We’d actually be sitting on a gold mine,” is how he put it.

 

DOMESTIC PROGRESS

The good news is that Hanoi has actually wavered on its no-locals stance. Tuoitrenews.vn reported in late August that during a meeting of the National Assembly, Phung Quoc Hien, chairman of the Assembly’s Committee for Finance and Budget, proposed that Vietnamese be allowed to gamble on a pilot basis at casinos in the Van Don Special Economic Zone in northern Quang Ninh Province. If the pilot is successful, the ban against domestic play will be repealed at other casino locations. The Poliburo said it would consider the Van Don measure, which could take effect as early as first quarter 2014. 

“My opinion is they’d like to see how this goes,” Wolfe said before the Van Don allowance. “We have a good relationship with the government, we talk to them all the time, and my expectation is they want to see a good experience with our property and others that they may allow to do international business. I think if there’s going to be local gaming, it’s not next year, it is a couple of years out at the earliest.”

It’s like the accessibility issue, a work in progress.

The critical short-term piece is the ability to bypass the port highway out of Ho Chi Minh. That would shave an hour off the drive from the airport. It’s expected to materialize in the first half of next year with the completion of a direct east-west expressway. An international airport is planned for Long Thanh about 70 kilometers from Ho Tram and could be open within five years. There are other ways in. One of the ITOs is talking about running luxury cruises into the port town of Vung Tau about an hour’s drive away. The Grand is also whisking select players in by helicopter directly from Ho Chi Minh.

“There are other airport solutions that are available,” Wolfe said. “We’re in direct discussions about charters with people that have very strong tour relationships throughout the region: frankly, as far away as Russia. We can drop people within an hour of the property.”

He’s not worried. As he sees it, The Grand has met its greatest challenge with the snip of that ribbon on the last Friday in July.

 “To have one property here over time is not at all our desire or the government’s desire,” he said. “But at the same time, the other element is that at some point we hope and believe that the government will offer in some way gaming to locals. So we’re basically wedging ourselves between building the critical mass for this location, creating a platform that will be successful and profitable on its own, but over the long pull, if local gaming comes, it’s a grand slam. … It’s not a big secret. It’s the underpinning of our whole strategy: Get in, do it right, build the business and be in a position that if the larger opportunity presents itself, that’s just frosting on the cake.”