GGRAsia – Summit 2018 EBITDA risks Russia tax plan pain: analyst

Summit 2018 EBITDA risks Russia tax plan pain: analyst

Nov 29, 2017 Newsdesk Latest News, Rest of Asia, Top of the deck

A possible increase to the tax burden on casinos based in Russia could reduce Summit Ascent Holdings Ltd’s 2018 earnings before interest, taxation, depreciation and amortisation (EBITDA) by as much as 6 percent, brokerage Union Gaming Securities Asia Ltd said in a note released on Wednesday.

Hong Kong-listed Summit Ascent – headed by casino investor Lawrence Ho Yau Lung – is the lead developer of the Tigre de Cristal casino resort (pictured) in the Primorye casino development area, near Vladivostok in the Russian Far East. Phase one of the resort opened in autumn 2015. Tigre de Cristal is currently the only casino property in operation in Primorye.

It had been widely reported earlier this month that the Duma, the lower house of Russia’s parliament, had earlier this month backed a bill that would double a levy payable by casino operators per gaming device.

Unlike in Macau or Singapore, casino business in Primorye is not subject to a tax on gross gaming revenue. The Russian authorities instead charge a monthly fixed levy on each gaming device – gaming table or gaming machine – in operation.

The Russian authorities are reportedly aiming to raise nationally the monthly levy per gaming table to a minimum of RUB50,000 (US$843) and a maximum of RUB250,000, noted Union Gaming. The new draft bill aims also to raise the levy for gaming machines, from a current range of RUB1,500 to RUB7,500, to one of RUB3,000 to RUB15,000.

“Should the bill be passed and Primorsky [Krai region] chooses to remain at the high-end” of the tax range, it could have a negative impact on Summit Ascent’s 2018 EBITDA amounting to HKD11 million (US$1.2 million), or 6 percent, wrote the brokerage’s analyst Grant Govertsen.

More to come?

The note mentioned “further speculation that tax rates could be adjusted higher-still, post-2018.”

Union Gaming’s current assessment on the possible new tax burden for Summit Ascent is nonetheless more conservative than that of the casino operator.

Earlier this month, Summit Ascent warned its shareholders that, if the draft bill became law and the Primorsky authorities opted to impose levies at the highest possible rates permitted, there would be “a negative impact of approximately RUB9.02 million on the monthly gaming tax [sic] payable of Tigre de Cristal, equivalent to an annual negative impact of approximately RUB108.24 million,” – the equivalent of US$1.85 million.

Summit Ascent’s own estimate was made assuming that the number of gaming tables and gaming machines in operation at Tigre de Cristal would remain the same as recorded in September.

The Primorsky government currently charges a monthly levy of RUB125,000 per gaming table and RUB3,000 per gaming machine. In September, Summit Ascent paid a total levy on gaming operations amounting to RUB9.02 million, based on the 55 gaming tables and 286 gaming machines in operation at the property during that period.

However, Summit Ascent stressed in its November 7 filing that the national parliament’s draft bill proposing tax changes for the casino sector would still need to pass through the upper house, the Federation Council, and then be approved and signed off by President Vladimir Putin before being enacted.

In addition, citing contacts with representatives from the local government regarding the proposed tax changes, the filing stated that “the current intention of the Primorsky government is to propose to the local Duma (i.e. the Primorsky Krai Duma) to maintain the tax rates at existing levels (as they are within the ranges proposed in the draft bill), if the new federal law were to be enacted.”

Summit Ascent however added: “There is no guarantee that the Primorsky Krai Duma would necessarily approve such a proposal.”

Illegal gaming

Wednesday’s Union Gaming note also mentions other uncertainties, including reportedly a lack of enforcement against illegal gaming venues in Vladivostok, which Mr Govertsen said continue to capture “the vast majority of locals-oriented” gaming revenue.

“When combined with a potential doubling of taxes, [it] is likely to delay future phases and the developments of the other licensees,” the Macau-based analyst wrote.

The Primorye casino development area is located 50 kilometres (31 miles) from Russia’s Pacific port of Vladivostok. Aside from Summit Ascent, currently two other firms are investing in gaming facilities in Primorye.

Hong Kong-listed casino operator and developer NagaCorp Ltd had a ceremony to break ground on its Primorye site in May 2015. The company has more recently said it aims to open the property in the first half of 2019.

Diamond Fortune Holdings Ltd began earlier this year ground preparation for its first casino resort in Primorye. The firm has said it plans to open the first stage of the project – named Selena World Resort and Casino – in 2019.

Yet Union Gaming’s Mr Govertsen said that, due to “concerns on the (lack of) progress of peer licensee casinos,” Summit Ascent is likely to “slow-play the development of Tigre de Cristal’s phase, which is slated to open in the second half of 2019.

That’s because, “without the positive effects of concentration, a single asset in a jurisdiction like Primorsky will not enjoy the same levels of GGR [gross gaming revenue] growth seen in other regional jurisdictions,” the analyst wrote.

In September Mr Ho pared his holding in Summit Ascent from 27 percent to 19 percent. “We view this as an indicator that Mr Ho sees greater opportunities elsewhere,” the Union Gaming note added.