Union Gaming Group’s Asian Market Report

From Macau to Singapore to Cambodia, the experts at Union Gaming Group travel the world to learn about the latest trends, study new markets and meet major players in the industry. The Asian market as a whole is complex, which is why Grant Govertsen, Bill Lerner and Rich Moriarty are here to help us understand it. These Union Gaming Group team members spend significant time in Asia in order to understand physical plants, feeder markets, governments and the various players in these jurisdictions. They do this because, as Lerner says, “Asian gaming markets will be the focus of capital investment for major gaming companies given more favorable return profiles, relative to highly taxed jurisdictions in the U.S.”

From saturation to opportunity, family-oriented travelers to hardcore gamblers, growth to extreme growth, each jurisdiction in Asia is distinctly different. So it is only appropriate to take a look at each of the major markets in Asia one by one.

2010 marks the opening of two major casino resorts in Singapore, putting it on the map in the gaming world in a big way. The country is 24 times larger than Macau and has nine times the population. Resorts World Sentosa, by Genting Singapore, began its phased opening on Feb. 14. Marina Bay Sands, by Las Vegas Sands, will open in phases throughout the spring and summer. Lerner, like many, has big expectations for this market. “We think Singapore further penetrates relatively proximate markets instead of simply taking share from other markets,” he said. “This includes Indochina, the Middle East, India, Indonesia, Malaysia and, of course, Singapore.”

The two resorts opening this year come from distinctly different parent companies and aim to serve different niche markets within Singapore. Marina Bay Sands is expected to play off of its parent company’s historically convention-based business. “They know the MICE (Meetings, Incentives, Conferences and Events) business better than anybody,” Govertsen explains, noting that the location of Marina Bay Sands will do well with this because it is in the heart of a massive business hub in Asia. “There is a tremendous amount of convention business going on there already, and Las Vegas Sands, with their expertise in that business, feels that they can go in and capture and grow the convention market.”

Resorts World Sentosa, on the other hand, will focus on attracting the entire family for a vacation full of fun and gaming. It features hotels, casino floors and a Universal Studios theme park. Many Western investors and analysts are leery of this concept being successful in Asia. However, the Union Gaming Group team believes Resorts World Sentosa will be wildly successful. “It is clear that Genting is a very capable operator, especially as it relates to attracting massive family business to their properties,” Govertsen noted. Now months after its opening, Union Gaming Group has heard that gaming revenue numbers are likely very positive and above expectations.

The government in Singapore has put plenty of time and thought into its new gaming laws, and it has created special rules in an attempt to prevent any negative outcomes or negative press associated with gaming. Lerner believes this will make business particularly likely to boom. “Due to the government’s thoughtful tax and junket regimes, we suspect Singapore will be amongst the most profitable gaming markets in the world,” he said.

Govertsen explained the impact of the junket rules in Singapore as such: “The transparency requirements are such that it will discourage almost all junkets from even applying for a license. So you’re probably going to have a single-digit number of junkets operating there, as opposed to hundreds in Macau.”

He believes the two new resorts in Singapore will be affected differently by the junket laws. Govertsen says Resorts World Sentosa will not need junkets to fill the casino, largely because it will have access to its sister resort’s (Genting Highlands in Malaysia) player database, thus having plenty of people to directly market to. “Las Vegas Sands, on the other hand, has relied heavily, although not exclusively, on junkets for success in Macau, and will have to do more direct marketing,” Govertsen added. Marina Bay Sands will have help in the form of access to the Sands’ database of high rollers from Las Vegas and Macau.

Because the new casino resorts are aimed to attract foreign travelers, Singapore residents must pay an entry fee to access them, which will stop many from entering. “The reason they licensed casino resorts was to help boost tourism; having locals gamble does not help tourism,” Govertsen explained. This is not necessarily because of financial concerns for residents. Instead, it is another result of the government’s goal to avoid any social problems that may arise from casino gaming. Other forms of gaming have existed in Singapore for many years, including lottery, sports betting, horse racing and casinos onboard cruise ships.

Genting Highlands is the evidence Union Gaming Group cites when explaining why they believe Resorts World Sentosa’s family theme will be a big hit. Genting Highlands in Malaysia has a family element with a theme park, golf and more. Govertsen has visited the site and paints this picture: “When you go out there, you see a ton of families and a ton of gamblers, with a good mix of both. So maybe Dad is hammering away at the baccarat table, and Mom and kids are on the theme park rides.”

Highlands is the largest casino resort in the world, with a $500 million cash flow each year, making it one of the top-earning casinos in the world as well. Govertsen says Highlands is not a primary focus of Western investors because it is hard to get to, but it is an interesting market. Genting Highlands was given the only gaming license in the country, thus making it the only casino in Malaysia. Govertsen believes that because of the country’s cultural and political climate, another casino will not be licensed any time in the foreseeable future.

For the first time in generations, Cambodia is free, and the Union Gaming Group team says the excitement was palpable on their recent trip to Phnom Penh. The freedom in Cambodia however, does not extend to gaming rights. Local residents—unless they hold a foreign passport—are not allowed to gamble there, because the country is still very poor. According to the World Bank, Cambodia’s Gross National Income per capita in 2008 was $600 (U.S.). Govertsen believes the restrictions may change at some point in the future if the population becomes more affluent. But until then, tourists and residents holding foreign passports are the only people who will be able to enjoy NagaWorld by NagaCorp. Currently, tourists from Korea make up the majority of visitors to Cambodia.

Union Gaming Group recently added NagaCorp to its top-pick list, focusing on NagaWorld Casino in Phnom Penh. Lerner explained: “Naga is exciting because of its opportunity to become the entertainment destination of Indochina in conjunction with governmental support throughout Cambodia, Vietnam and Thailand. The company is growing its junket business by capitalizing on its diminimus gaming tax rate and world-class resort by offering higher rebates and junket commissions than others in Asia can.”

NagaCorp has the only rights to operate a casino in a 200-mile radius of the city through 2035. “For all intents and purposes, NagaCorp is the exclusive gaming operator for much of Cambodia,” Govertsen explained.

Govertsen calls NagaWorld a first-class facility with first-class amenities, although most gamblers don’t seem to notice much other than the gaming floor. “It is still much like Macau in that most people are there to gamble rather than to take advantage of the spas or the food and beverage … there will be a gradual change over time as those amenities are marketed to them,” he said.

Govertsen also says NagaWorld would stand up very well to casinos like Red Rock, Green Valley Ranch or M Resort in the U.S.

There are many more reasons Union Gaming Group is excited about NagaWorld. For starters, the tax rate it will pay through 2018 is less than 2 percent—compared to 39 percent in Macau—which allows outsized returns on invested capital. It has no long-term debt, low labor costs, a favorable VIP commission structure and well-established relationships with junkets, while also catering to mid-tier VIP players.

NagaCorp also has the exclusive right to issue or sell sub concessions, which it has not yet done. Lerner says that this could result in a notable liquidity event for the company. When this happens, it may be the way for Western operators locked out of Macau to enter the Asian market—by buying a license from NagaCorp.

There is one thing Union Gaming Group says Cambodia does not yet have, but that it needs to attract foreign investors or operators: a solid regulatory framework—i.e., a gaming control board. Govertsen explained: “It does not exist right now in Cambodia. Everything is on the up and up, however, to give investors and or operators the comfort level they would like to have but currently can’t have, would be a gaming control board put in place.”

Govertsen believes this will happen in the near future, largely because NagaCorp is lobbying the government for it. The lack of a gaming control board makes many imagine Cambodia is Asia’s version of the American Wild West, but Govertsen insists this is not the case. There are money laundering laws and multiple government entities that currently serve the roles of a gaming control board. There is just not one body in charge to give the perception to the world that laws are being created and followed.

There are about two dozen other casinos in Cambodia, found along the border with Vietnam, where anybody can operate a casino. These border casinos are small, though, and Govertsen says they do not seem to have much of an impact on business at NagaWorld. “If you’re operating a casino on the border, you’re basically just trying to capture local Vietnamese or local Thai people, who clearly aren’t as affluent as gamers who might otherwise go to a place like Macau or NagaWorld,” he explained.

The gaming market in Macau has grown at staggering rates over the past year. We have seen revenue soar since July 2009, and in March we saw a 57 percent revenue growth YTD. The question is, how long will it be allowed to last?

Before we share Union Gaming Group’s answer, let’s remind ourselves that gaming was liberalized in Macau in 2002. The six available gaming licenses in Macau are obviously already taken, and Union Gaming Group does not believe more will be issued. More than 90 percent of visitors to Macau are from mainland China, Hong Kong and Taiwan. The players are hardcore gamblers who are interested in table games, especially baccarat. Macau relies heavily on VIP play, and junkets play a major role in it all.

There has been considerable buzz surrounding a recent announcement by Macau’s new chief executive, Fernando Chui. He used his first policy address to announce stepped-up control over new casino development in the market. Projects that have already been agreed to in principal, are under construction or have gained approval will continue as planned. However, a new regulatory body will monitor gaming industry growth and “regulate” any new development. Govertsen says operators are not concerned about these new rules “simply because they know there is a lot of supply there right now, there is a lot of supply coming online next year that is already accounted for in these growth caps. Let’s see what happens after that. Assuming the market grows and demand is there, I think all of them are in agreement that the government will not do anything overly irrational.”

Union Gaming Group keeps a close watch on the supply front in Macau and expects a favorable finish to 2010. This year, the only expansion comes from Wynn Encore. With 61 tables, it represents a less than 1 percent table supply growth in the market. Union Gaming Group believes caps on junket commissions and outsized revenue growth, even if for just part of 2010, will translate to an exceptional earnings year. Govertsen says the 2011 gaming supply is more concerning given the combination of Galaxy’s Cotai project and Sands China’s Cotai expansion, collectively adding about a 26 percent table supply growth. The Galaxy Macau, a $14.1 billion project, is expected to open in early 2011. Las Vegas Sands’ project is expected to open its first phase in June 2011. With it, Union Gaming Group expects the company to see a nice boost to its market share. Other projects have been approved or agreed to in principal, such as Wynn’s Cotai project. They collectively suggest to Union Gaming Group that despite Chui’s supply-focused commentary on controlling new casino development, there is a substantial amount of incremental supply to work through before it becomes relevant.

Many people are still waiting to see what kind of behind-the-scenes puppeteering the Chinese government will do to limit or cap growth in Macau. Union Gaming Group does believe the impact of tightening credit in China continues to loom, as does the potential for tightening visa approvals. That could catalyze a moderation of Macau growth. However, as of April 2010, neither has been an issue.

Keep in mind, however, that slowing growth in Macau is really a relative term. Govertsen explained: “As we look forward, the government is probably comfortable with a 10 to 15 percent growth rate. The reality is, if that’s how the market plays out long term, 10 to 15 percent growth is very favorable compared to any major gaming market. If you think about it, you are talking about doubling the market every six years or so, and that is phenomenal growth in the grand scheme of things.”

Lerner says there is one thing that is not well understood about Macau. He sees a great Wall Street focus on monthly gaming revenues and timing of transient visa restrictions, but doesn’t get the point of it. “In the scheme of things, who cares?” he said. “Perhaps the market is a mechanism for convertability of RMB, in which case we are just scratching the revenue surface. Layer in the build out of transportation infrastructure in China and connectivity into Macau, and this market will dwarf its current size. The best part is the limited gaming license environment, which should foster outsized returns on invested capital for the six concessionaires.”

Other Areas of Interest
There are many other Asian markets that may see expanded gaming in years to come. “It’s probably a question of when, and not if, in most of these jurisdictions,” Govertsen said. “But the question is when—is it this year, next year or in 10 years? Who knows?”

Voters in the outlying islands of Taiwan will likely get another chance to approve gaming this year, which may be something to watch this summer.

The Phillipines is the new home of Resorts World Manila, one of the business segments under Genting Hong Kong Ltd. When complete, it will have 1,600 slots, up to 381 table games and a small retail and entertainment element. Unlike other Genting casino-resorts, it will not have targeted family entertainment. Other smaller, local projects are also being built in the Phillipines.

Thailand does not currently have sanctioned casino-style gaming, and the current ruling party and the king are against gaming expansion. But a change in leadership there could change the rules. It is anticipated that general elections will be held by the end of 2010 or 2011, at which time ex-Prime Minister Thaksin Shinawatra would be eligible to potentially re-take office. “If he were to return to power, that certainly could be beneficial to the prospects of gaming expansion in Thailand,” Govertsen said.

He also said there appears to be strong support for Thaksin’s re-election. “Even if there is a political change, obviously a lot has to happen for that to become a reality,” he explained. Thaksin would like to hold a national referendum on casinos, preferring four locations in the country.

He added, “There appears to be support for a legalized system taking into account that half the population is believed to gamble illegally at present.”

Union Gaming Group believes NagaCorp would be well positioned for one of several Thai casino licenses.
Finally, with fear of sounding like a broken record, Govertsen says something could possibly happen this year to expand gaming in Japan, “given budget deficits and the aging population, Social Security-type problems (unfunded mandates).”

“Any gaming license issued would likely be worth hundreds of millions of dollars, if not more,” he said. “In addition, the tax revenues that would be generated would be quite substantial.” Govertsen said it would be a very, very big deal to have gaming in Japan. There are 127 million people living there, making it a massive proclivity to gamble, and it’s a wealthy nation.

“So, certainly Japan would be an extremely interesting place for all the major Western operators, as well as probably some of the domestic Japanese gaming companies,” he said.

And the Punch Line Is …
Now that you know the details, you will be awarded with Grant Govertsen’s punch line when it comes to gaming in Asia: “No matter where you go in Asia, despite different geographies where it is taking place and the different formats it’s taking place under, Asia, when compared to the United States, is still in the early stages of gaming expansion. It will be a primary focus of gaming operators in the next five, 10, 20 years, relative to the opportunities back home.”

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