The Great Race: regional competitors eye Macau players

Aug 20, 2014 Newsdesk Features, Latest News  

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Several jurisdictions neighbouring China appear to be stepping up their attempts to either enact or liberalise laws to encourage foreign direct investment by casino companies.

This activity has coincided with what the media in mainland China has described as an escalation in the crackdown on official and business corruption there, and an apparent appetite for Macau junkets and their Chinese customers to explore new regional markets for casino gambling.

But if players, junkets and even casino operators want to look beyond Macau, what could be the motives? Value for money and better margins are two likely reasons, but also more investor friendly regulation, as other governments witness the benefits the gaming sector can bring in terms of fiscal revenue.

“The success story of Macau and Singapore – at a later stage – have encouraged other jurisdictions to take action,” Manuel Joaquim das Neves, head of Macau’s Gaming Inspection and Coordination Bureau, told GGRAsia.

“If it is well regulated and there are transparent rules and enough scrutiny, the development of the gaming sector is positive for the tourism industry and for economic diversification,” Mr Neves added.

Other regional jurisdictions certainly seem to be stepping up their efforts to woo foreign casino investors.

Last week it was announced that South Korea’s Ministry of Culture, Sports and Tourism intended to reduce regulatory barriers faced by developers of integrated resorts that contain gambling facilities.

The changes will include a formal bidding system for selecting casino operators, according to South Korea’s Yonhap news agency.

Las Vegas Sands Corp confirmed to GGRAsia that in late June the firm’s chairman Sheldon Adelson visited Seoul and met the mayor of South Korea’s capital. The company already operates casinos in Macau and Singapore.

Gary Loveman, chief executive of Las Vegas-based Caesars Entertainment Corp – the first major foreign casino operator announced as an investor for South Korea – has said the company is working to open its casino project at Incheon Free Economic Zone near the capital Seoul, before the 2018 Winter Olympics in South Korea, taking place from February 9 to 25 that year.

Following suit

There have been reports that Vietnam’s Ministry of Finance has completed a draft decree that could allow economically qualified Vietnamese nationals aged over 21 to gamble in domestic casinos. Currently only holders of foreign passports can gamble in the country’s casinos.

Vietnam already has foreign investment in the casino sector, including Asian Coast Development Ltd and its Ho Tram Strip.

Further to the northeast, on July 18, the Japanese government said it plans to set up a new cross-departmental body that could help speed up the process of opening the first casino resorts in that country in time for the Summer Olympics in Tokyo in 2020.

Japan has made it clear it would welcome bids from foreign operators as and when it legalises casino resorts, because of their expertise, and because of the government’s desire to boost inward tourism to Japan via world-class casino facilities.

Jim Murren, chief executive of MGM Resorts International, said on the firm’s earnings call for the second quarter that the company has a team deployed in Japan with offices in both Tokyo and Osaka.

In late June, industry sources confirmed to GGRAsia that the Cambodian government is in the process of amending its gaming laws in a bid to draw major casino operators. The new draft of the national casino law could be finalised as early as this year.

“Having seen Macau become the fastest-growing gaming region in the world, these jurisdictions see punters on their doorstep and want to be able to invite them in,” said Karl John, chief expert of Asia Trade Experts, a consultancy specialising in advising companies on strategies for expanding in Asia.

Mr John said he believes other jurisdictions will try to replicate the growth story of Macau and Singapore.

“Other jurisdictions have seen success in the area and revenues providing governments with an important income source which is badly needed during current economic hardships,” he added.

Leading thinkers about the regional casino industry have identified Japan and South Korea as the two top contenders for future development of casino gaming in Asia.

“Korea is the obvious first one, because they already have a gaming industry,” said Grant Bowie, chief executive of MGM China Holdings Ltd, the Macau unit of MGM Resorts.

He added: “If they [the Japanese] are looking for the Japanese market to be opened in or around the Olympics, recognising the lag it takes and then the construction timeline, they really don’t have a lot of time. And politically, governments have to go back to elections – you don’t ever want to have this sort of decision placed at election time.”

Opening to locals?

One of the issues being considered by some of the jurisdictions now planning to loosen gaming rules is whether nationals would be allowed to play at home. Cambodia and Vietnam bar their citizens from entering casinos, while South Korean nationals are only allowed to gamble at Kangwon Land, a difficult-to-access location 150 kilometres (93 miles) southeast of Seoul in Kangwon province.

Japan is mulling an entry levy on casino visitors were casino gaming to be legalised in the country, likely following the Singapore levy model. Singapore imposes on its citizens and permanent residents a statutory entry fee of either SGD100 (US$80) for 24-hour access, or SGD2,000 for a year’s entry but is content to give foreigners free access.

To allow casino operators to tap the local market base could be more attractive to lure big investors. Domestic players of table games and slot machines are likely to provide returns with lower volatility and potentially more profit on lower volume than VIP baccarat, the credit-funded Asian high rollers’ game of choice.

While MGM China’s Mr Bowie thinks that casinos in other jurisdictions will open up to locals, he sounds a note of caution: “Governments understand that if they made a decision of not having locals gambling, to change that, to allow them to gamble, is actually a very big decision to make. That often takes longer than people think.”

According to Asia Trade Experts’ Mr John, opening casinos to locals is not a big issue in large jurisdictions with a healthy tourist sector, which can sustain the casino operation. “In smaller jurisdictions or in those where the tourism sector is not robust, the end game for investors must be the involvement of the domestic gambler,” he said.

Tim McNally, chairman of Hong Kong-listed NagaCorp Ltd – the operator of the Nagaworld casino resort in Phnom Penh – said it is possible that Cambodia’s gaming industry will move to a model based on a fee for locals to enter casinos.

“As time goes by, I would only expect that the government of Cambodia would create a more formalised structure. That’s the feedback I have received in conversations with gambling officials,” Mr McNally told GGRAsia.

A more friendly regulation in Vietnam would also be enticing for NagaCorp. “We’ve always looked at Vietnam. The focus of our growth and development was always to look at Indochina,” Mr McNally said.

“Like others, we will wait and see what the government of Vietnam decides on things like taxation and access to the market,” he added. “We would look at the market, but we are well aware that a gaming licence is a political licence.”

Union Gaming Research Macau Ltd said that it is likely that four zones would be contemplated for the pilot stage of allowing locals to gamble in Vietnam. “The four zones include the north, central coast, south, and possibly southwest (an island near Cambodia). The only existing casino that would likely be part of the programme would be Ho Tram in southern Vietnam as it represents the level of investment the government would like to see,” the research house said last week in a note.

Tax advantage

Gaming companies from time to time explore the possibility of integrated resort operations in fresh jurisdictions in Asia, attracted by factors including the possibility of low taxes. But other factors to be considered include the local legal and regulatory framework, the market size and the scrutiny from gaming regulators in their home jurisdictions, an industry source told GGRAsia.

The Philippines’ low tax rates on casino gambling relative to Macau’s rate are a factor affecting what casinos in Manila can offer junket promoters – which recruit rich gamblers in China and extend loans to circumvent limits on cash they can take out of the mainland.

Tax on VIP play in the Philippines is the equivalent of 15 percent of the gross – once the 5 percent gross gaming revenue (GGR) tax from the Philippine Amusement and Gaming Corp (Pagcor) and the 30 percent corporate tax on casinos’ net profit from the Bureau of Internal Revenue is taken into account.

The mass table games tax rate in the Philippines is the equivalent of 27 percent of GGR, i.e., 15 percent plus 2 percent for charity contributions, plus the corporate tax.

Macau’s direct tax on gambling at 35 percent of the gross plus other contributions bring the effective tax rate on casino wagering in the city up to 39 percent.

Macau does not however have a sales tax on other goods and services unlike many other jurisdictions, and that can be an incentive in attracting high spending visitors.

Singapore – which has two casino resorts – has an effective tax rate of 12 percent on the VIP gross (5 percent gaming tax plus 7 percent Goods and Services Tax) and 22 percent on the mass (15 percent gaming tax plus 7 percent Goods and Services Tax).

South Korea’s gaming tax rates are also competitive with existing regional casino jurisdictions. The country’s Ministry of Strategy and Finance levies a 20 percent tax on gross casino revenues.

‘Logical evolution’

A number of existing casino operators in the region see the development of the gaming industry in Asia as a natural evolution.

“When you look around in Asia, including Macau, there will be certainly improvements; be it legislation changes, greater scrutiny regarding suitability requirements. That is a logical evolution of the gaming sector,” said Mr McNally.

Governments often look to the tax revenue the gaming sector produces, but also to the spillover effect it can have to other industries like tourism.

Gaming revenue in South Korea totalled US$2.7 billion in 2013, according to CIMB Investment Bank Bhd. That was slightly higher than the Philippines at US$2.6 billion. Those jurisdictions still trail Singapore at US$6.4 billion last year and are far behind Macau at US$45.2 billion.

New supply of casino gaming arguably means that established markets such as Macau have to refresh their offer in order to maintain their competitiveness.

“The critical point is that we in Macau have got to do the right thing: we have to respond to the policy directives, to how the system is evolving and, the most important thing; we need to maintain our competitiveness and desirability for our customers,” said MGM China’s CEO.

“If our customers prefer to go somewhere else, then that is the biggest challenge. It is their money, it is their choice,” Mr Bowie added.

Macau gaming revenue appears to be showing the first signs of deceleration after a five-year bull run. Casino GGR fell for a second consecutive month in July, on the back of slower growth for mass table revenue and a continued decline in VIP play.

Macau’s Secretary for Economy and Finance, Francis Tam Pak Yuen, said earlier this month that the city’s gaming industry would see a single-digit growth this year as it enters a “stable” phase of development.

Nonetheless, Macau is still a few laps ahead of the regional competition, said the city’s top gaming regulator. “In the short-term, the development of the gaming industry in Asia will not have an impact on Macau,” Mr Neves told GGRAsia.

Junket expansion

China’s reported corruption crackdown, including greater scrutiny of spending by senior public officials and senior managers of state enterprises, seems to have fed through to Macau’s gambling market.

In the three months to June 30 in Macau, VIP’s contribution to the gaming gross in the territory slipped to only 60 percent according to official data. In some previous reporting periods in the past five years it has been closer to 70 percent.

As scrutiny of players and their money is reportedly increasing in Macau, competition in the Macau market for players’ cash is also is increasing. Junket operators are stepping up their game, including offering to take customers to destinations outside Macau, that have potentially lower overheads than Macau, and thus better deals for players.

Matt Hurst, executive vice president gaming operations and marketing at the under construction Manila Bay Resorts in the Philippines, recently told GGRAsia that some of the existing private sector casinos in Manila are offering junkets 50 percent revenue share, versus operators in Macau offering 40 percent or 42.5 percent revenue share.

Macau-based junket operators already have deals and VIP rooms in other jurisdictions, like the Philippines and Australia. Publicly available data show the number of gaming promoters licensed by Macau’s gaming regulator stood at 217 in January 2014.

“The package that some of the [casino] operators in other jurisdictions offer is better for us and allow us to have a more diversified offer,” a representative from a Macau junket group told GGRAsia.

“Our VIP customers are asking to go to other places and try a new experience but they always end up coming back to Macau,” the person said.

“There is yet no place in Asia like Macau, where VIP players can go to different casinos and try other kinds of entertainment in such a convenient way,” the person said, adding that most high-rollers are mainland Chinese and, despite the reported crackdown, “feel more comfortable” in Macau than elsewhere.

Political favour

Steve Vickers, chief executive of Steve Vickers Associates, a specialist risk mitigation and intelligence firm based in Hong Kong, told the Japan Gaming Congress in Tokyo in May, that there was a battle for political favour going on among the Macau junkets.

“Some of the [Macau] junket operators – that are coming under increasing [Chinese government] control – are viewed [domestically] as politically sound, and some are viewed as not politically sound,” he added.

Analysts from Deutsche Bank and Credit Suisse AG in Hong Kong a fortnight ago separately suggested that junkets were very far from being in retreat. They said some of the recent slowing in the growth of the Macau mass market might be connected to former premium mass players being approached by junkets and converted to VIP players.

Some Macau junket operators are currently even kicking the tyres on would-be gaming investments in the middle of the Pacific Ocean. Amax International Holdings Ltd said in a filing to the Hong Kong Stock Exchange in late March that it intended to purchase a stake in a company with an interactive gaming licence in the Republic of Vanuatu, although this month it for a third time extended the deadline to complete the deal.

Last week, Macau junket investor Imperial Pacific International Holdings Ltd pledged to spend US$3.14 billion for an exclusive 25-year casino licence it has been awarded in Saipan.

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