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Risky business

Gambling is all about taking risks and nowhere more so than in some of Asia’s rapidly emerging markets.

A lack of regulation; lack of infrastructure; corruption; poor security and over reliance on visitors from China can mean that an investment that looked good on paper ends up being worth little more than the paper it was written on.

For our focus section in the ASEAN edition of Asia Gaming Briefings, we take a look at some of the risks involved in gaming in Asia, both land-based and online.

For our first article, we examine some of the likely risks to be faced by operators in Southeast Asian markets in 2019. After a year of nasty regulatory surprises in Malaysia in 2018, this year is expected to be relatively calm, as is also the case for Singapore. Though topline growth in these markets may be hard to find as the slowdown in China’s economy causes its high rollers to tighten their purse strings. In the Philippines, however, it’s a different story. The country’s mercurial president is likely to keep both land-based and online operators on their toes. Much of the future expansion in what has been one of the region’s best-performing markets will depend heavily on whether he has a change of heart towards the gaming industry.

Our second article takes a similar approach, comparing and contrasting the risks and rewards of investment in Indochina. Both Vietnam and Cambodia are seen as having enormous potential. However, Vietnam’s regulated and measured approach to the industry is in stark contrast to the explosive growth in Cambodia, where long-delayed regulation has yet to see the light of day and hot money from China is driving expansion.

In the world of eSports, operators are still struggling to work out how to tap the potential. We look at some of the more common pitfalls facing those trying to enter the sector and find a basic lack of understanding has lead to some reputation-shattering errors, such as taking bets on tournaments that don’t exist.

Lastly, in our focus section we look at the risks for online gaming. As other jurisdictions around the world put in place regulation, most notably the U.S., Asia will face more competition for investment. That said, its potential is still too big to ignore and companies will need to learn how to mitigate the risks of operating in unregulated markets with often hostile governments.

China influence to define outlook in SE Asia

Regulatory risk, political uncertainty and exposure to a Chinese economic downturn will factor into the performance of casino sectors in Malaysia, Singapore and the Philippines - albeit to varying degrees.

From a regulatory perspective, changes in Malaysia and Singapore are unlikely. Malaysia’s gaming sector endured something of an annus horribilis in 2018, headlined by a casino duty rates hike of 10 percentage points to 35 percent of gross gaming revenues. The new rate came into effect on January 1.

The change will cut Genting Malaysia’s earnings by 30 percent, according to estimates from Samuel Yin Shao Yang, associate director at Maybank Investment Bank Berhad.

The silver lining is that it should be some time until any further changes. “I don’t think there will be much more regulatory risk in Malaysia this year after a horrible year last year,” said Yin.

In Singapore, we are also unlikely to see changes to duty rates, which have been fixed at five percent for VIP and 15 percent for mass market until 2022.

However, Marina Bay Sands and Resorts World Sentosa are exposed to a degree of regulatory risk around the Singapore government’s Greater Southern Waterfront redevelopment project.

It is understood both integrated resorts have been asked to contribute to the project, but there remains uncertainty around whether additional hotel rooms, slot machines and electronic table games will be offered as a sweetener.

In contrast to the regulatory stability of Malaysia and Singapore stands the Philippines.

“The Philippines, as usual, carries the highest political risk of any jurisdiction in Asia,” Ben Lee, managing partner at IGamiX Management & Consulting, told AGB.

“Apart from an apparent disconnect between PAGCOR and their country’s president, the ever moving goalposts that is the Philippines makes it difficult for any sizeable foreign investor to seriously consider the country,” Lee added.

According to Steve Vickers, CEO of specialist political and corporate risk consultancy Steve Vickers and Associations (SVA), weak regulation and arbitrary enforcement will create significant uncertainty for the market.

“The Philippines’ regulatory framework is far weaker than that in other countries around the region, given the widespread nature of graft and the frailty of the rule of law. Indeed, the application of regulations can in some cases appear to be arbitrary, or at least prove ineffective,” Vickers told AGB.

Growth potential

Despite this uncertainty, the Philippines will likely enjoy the strongest growth of the three markets in the near time.

“The Philippines gaming market will continue to surge in the short to medium term, driven by proxy and online activities,” said Lee.

But Malaysia and Singapore will have a tougher time of things. “Malaysia and Singapore will remain flat, the former mainly a domestic play and the latter without any junket to help drive it,” Lee added.

Yin said Resorts World Genting may struggle this year, as the higher casino duties start to bite. “Even if its gaming volumes do grow - we forecast 10 percent growth - the significantly higher casino duty rates will inevitably erode its earnings. We expect Genting Malaysia’s 2019 earnings to fall 25 percent almost entirely due to the higher casino duty rates,” Yin said.

For Singapore, there is concern that the weak outlook in Macau for VIP GGR will spread to the jurisdiction, although Yin said he can foresee high VIP volume generation leading to growth.

The China factor

But aside from domestic regulatory and growth factors, it is the influence of China that will likely define the outlook for the region.

“One of the key concerns will be Chinese government attitudes to capital movement, given the predominance of Chinese VIP gamers in casino revenues,” said Vickers.

Vickers noted the weakness of the Chinese economy, rising debt and pressure from the US as reasons why capital control policy will likely gain more weight in strategic considerations as the year progresses. “Sudden crackdowns on movement of funds out of China would inevitably affect casinos across Asia,” he added.

Lee said trade tensions between the US and China, which have seen manufacturing relocating to the likes of Vietnam and Cambodia, has in turn seen VIP gaming divert from Macau to these jurisdictions; their continued growth could put pressure on Singapore, Malaysia and the Philippines as competition for China’s VIPs heats up.

Ultimately, all three jurisdictions will not be able to disentangle the outlooks for their respective casino sectors from China.

“The growth of Asia’s casino businesses is a symbol, to some extent, of the success of China’s economic development. However, it also represents a vulnerability, in terms of outflows of capital into other jurisdictions,” said Vickers.

“Beijing may become more cognizant of these concerns in the months ahead, particularly if states such as Malaysia continue to roll back Chinese influence. As such, those businesses that are perceived as being too close to the US could face challenges.”

Indochina opportunities clouded by political, economic risks

Despite regulatory uncertainty and a relatively high risk profile, land-based operators will be closely watching developments across the Indochina region over the coming months.

Cambodia, Vietnam, Laos and Myanmar offer varying degrees of opportunity for operators keen to invest in the region.

“Southeast Asia is a hot market at the moment with lots of new development, especially in Vietnam and Cambodia,” Stephen J. Karoul, president and CEO of boutique casino consulting company Euro- Asia Consulting, LLC, told AGB.

But these markets are not without significant political and operational risk. Perhaps the most appealing of the four is Vietnam. “I think Vietnam has the greatest likelihood of moving towards a contemporary model of casino regulation, and it is certainly likely to elevate the standard of compliance above that of the other emerging jurisdictions around it,” David Green, former gaming practice director with PricewaterhouseCoopers in Macau and founder of gaming consultancy Newpage Consulting, told AGB.

The early signs in 2019 are promising. In January, the Corona Resort and Casino opened its doors for the first time, and significantly it permitted eligible local citizens to gamble as part of a government-run three-year test program.

It is early days for both the Corona and the pilot scheme, which enforces strict terms on those locals it allows to gamble, including proving a minimum monthly income of more than $400.

But it is an encouraging first step for a jurisdiction which had previously taken an extremely tough stance on gaming, and there may be more to come. “Vietnam may further loosen restrictions on locals participating in casino gaming,” noted Green.

The industry will also be closely watching progress in Hoiana, where a multi-billion dollar resort complex, partly backed by Suncity Group Holdings, is expected to open its first phase by the end of the year.

The broader political and economic landscape is also favourable. GDP growth in 2018 was in excess of seven percent, and the government is among the most stable in the region. The only significant question mark is around exposure to China, where a US trade war and territorial disputes in the South China Sea could cause issues.

“Vietnam has the greatest upside potential, as it has some impressive new resort developments coming on stream, and the Hoiana project is hugely ambitious. If more local gaming is permitted, it will be a very attractive market for gaming operators,” said Green.

Beyond Vietnam

Elsewhere in the region, Cambodia is expected to finally adopt new gaming legislation this year, though as Green notes, it is unlikely to herald a real change in regulatory approach.

“Enforcement will likely be selective, and it is hard to see any licence in Cambodia, apart from that held by Naga, having material intrinsic value. Without value to protect, there is no real incentive to comply with applicable regulations,” he said.

There is certainly growth to be had in Cambodia’s casino market in 2019, but it remains incredibly fragmented. The market added some 52 licences in 2018 alone, and the country’s Ministry of Economy and Finance said there were 150 active licensees at the end of the year.

One upside could be the inflow of investment from China, with Cambodia arguably China’s primary ASEAN ally when it comes to claims over the South China Sea.

Over the border in Laos, it looks likely that casino licences will continue to be restricted to three. Despite Macau Legend’s pledged $300 million investment in Laos, progress will be slow.

“I don’t expect to see much uplift in the Lao PDR market, notwithstanding Macau Legend’s investment in it,” said Green. “It lacks critical mass and infrastructure, and is open to predation by Cambodian border casinos, which I believe will likely survive any new legislation for gaming regulation in Cambodia.”

Myanmar is even more of an unknown quantity. In September, the country’s lower house passed a bill that would permit the establishment of foreigner-only casinos.

However, the Rohingya crisis, high inflation and a lack of political reform do not provide a particularly appealing backdrop, even if GDP growth should top six percent in 2019.

Green notes that the market is not likely to “generate significant excitement among prospective operators, especially those accustomed to investing big in casino developments.”

Risk profile

The risk profile of all four of these markets remains tightly tied to the fortunes of China, and to a lesser extent, Thailand.

“Chinese and Thai gamblers are really a focus of all four jurisdictions,” said Green. “China is not currently performing, as an economy, as well as it has since 2009, and there may be renewed pressure on expatriation of capital, as there was from mid-2014.

“I don’t see any indication that Thailand is about to move to legalise casinos, which should ensure that the border casinos in Laos, Vietnam and Cambodia retain traffic from Thai gamblers.”

But it will still be tough for multiple emerging jurisdictions to enjoy strong growth when all are competing for the same player base.

“One concern for these countries will be market saturation and eventually dilution of the viable players,” said Karoul. “When that happens, ‘cut throat’ competition will kick in and that is when we will see numerous deals that just do not make economic sense for the casino operators, and unfortunately many of them will eventually go out of business.”

Similarly, operators will need to closely look at how they go about acquiring players, particularly in newly-emerging markets that will suffer greater volatility than would be expected in Macau.

“One cannot just continue to buy business via bad offers, high commissions or discounts that are not sustainable, so the strong will survive short-term but the weak will go under and out of business. Being under-capitalized will definitely hurt some operators in these volatile markets,” said Karoul.

Ultimately, while there are certainly highgrowth opportunities in the region in 2019, only those with an appetite for risk need apply.

Integrity and ignorance key risks for esports

The stellar projections for esports revenue have whet the appetite of online wagering operators, though the absence of regulation, questions over sports integrity and lack of expertise mean widespread adoption in the gambling industry may be far away.

By 2020, the number of esports viewers and enthusiasts are expected to reach a whopping 286 million, drawing in more than $12 billion in wagering turnover. Attracted by the potential and the younger demographic many operators, both land-based and online, have been dipping a toe in the market.

Seattle-based Unikrn, a ground-up esports betting provider established in 2014, currently offers their esports betting services to over 20 countries across Europe and Asia and is estimated to generate revenue of $10 million annually. Pinnacle Sports, which runs a successful esports book, is said to have taken more than 8 million esports bets since 2010.

Asia’s integrated resort & casino operators have also been making moves in this space, with many seeing esports tournaments as a way to attract a market segment outside of the traditional gambler.

In July last year, Melco Resorts and Entertainment opened an esports stadium at its Studio City IR in Macau, emerging as a pioneer for this kind of customer development strategy in Asia.

Later in the year, Melco CFO Geoff Davis told the Nikkei Asian Review that an esports stadium would “very likely” be a “key component” of its proposed Japan IR, while in January, Sands China hosted a PUBG invitational tournament at the Venetian Cotai Arena, attracting 16 qualified teams and a prize pool of US$500,000.

That being said, the move into esports poses multiple challenges.

“The reality is we are years away from really getting to grips with the best way to offer esports wagering entertainment,” said Sportradar’s managing director for Asia, Michael Maerz.

According to him, an industry-wide lack of understanding, trust, and acceptance of esports have held a lot of operators back.

“Some just don’t take it seriously, others see it as just a fad because they have never been gamers or don’t understand anything about the particular community.”

A few years ago, wagering operators that had adopted esports early had to scale back their esports product, or remove it completely, after it failed to reach expectations.

“Such bookmakers expected huge turnover from esports without preparing any different marketing, nor investing in the right expertise,” he explained.

One of the most common mistakes operators make is treating esports like any other niche sport, simply adding it as another offering to their existing product line up.

“A bookmaker’s existing customers are unlikely to be esports fans, largely, which means you have to go and find them,” said Maerz.

“The demographic that bets on esports is very prudent and will switch easily, so this needs to be kept in mind,” he added.

“When entering the esports market, as a business, you need to understand that esports doesn’t have a static set of games, tournaments, or even rules – it’s a constantly changing environment,” said Stephen Hanna, chairman of the Esports Integrity Coalition (ESIC).

“Bookmakers need to not only know the preliminary rules of an esports title but they also need to be kept abreast to any changes in the game that could affect its rules or winning parameters.

Esports is a spectrum, and operators need to truly understand the intricacies of this spectrum in order to be successful,” he added.

“We’ve seen operators offering odds on matches that had already concluded, or setting scoring parameters based on a whole other esports title completely,” said Hanna, adding that it’s more common than one might think.

Then comes the issue of integrity in esports – which carries a higher risk of match-fixing compared to traditional sports. Sports integrity body ESSA said this week it was seeing an increasing number of alerts about suspicious bets on esports.

“We’ve found that countries newer to the esports scene are particularly susceptible to match-fixing or cheating, as dissuading factors such as high player salaries or stringent integrity mechanisms are generally not present. However, we’ve also found cases of match-fixing occurring in larger, more well-known tournaments as well,” said Hanna.

“There are new cases of integrity breaches every year. It would be unfortunate not to learn from the mistakes of traditional sport and ignore the issue until it becomes a more widespread problem. Things are happening in the esports integrity space, but it has been slow going,” added Maerz.

To this effect, Hanna stressed that any operator in the space must have a wellinformed integrity network and to invest in the right expertise.

“We’ve seen operators starting to factor in esports learning as part of their R&D budgets in order to keep up with the latest developments in the space. This budget is generally used to hire consultants or engage with professional integrity bodies like ESIC.”

In many cases, establishing a line of communication with the tournament operators could be particularly important.

“Operators could be unknowingly offering odds on a game or tournament that is seen to attract an underage audience. This could cause irreversible damage to reputation, and in some cases, even their license. We have also observed a few occasions where an operator was offering odds on a tournament that does not even exist.”

“Operators that do not have the capacity to make these inquiries should reach out to informed integrity bodies in order to assure their product offerings are not detrimental to their brand and audience.”

With all these risks, it’s no wonder regulators are stepping very cautiously.

“Some of the biggest problems are not the operators but some of the regulators whose rules and processes are based on legislation that can hinder esports betting,” said Maerz.

“There are some regulation systems, for example, that require individual tournaments to be approved, others ban games with any kind of violence, while there are some places, for example, South Australia, that ban esports all together.”

“It has, and will continue to be a slow but necessary process. ESIC will continue to work with regulators in the space to further develop integrity measures within the industry,” concludes Hanna.

Asia finds its place in iGaming’s new world order

The global igaming industry has enjoyed significant regulatory breakthroughs around the world over the past year, but the emergence of a genuinely international sector is causing the world’s largest operators and suppliers to re-evaluate the role Asia plays in their revenue mix.

Online gaming has, for much of the last decade, revolved around a white marketgrey market axis dominated by Europe and Asia.

Many of the most successful operators and suppliers have followed a simple formula, investing grey market revenues from Asia to grow in the regulated markets of Europe. This approach has powered the growth of many of the most recognisable names in iGaming, perhaps most notably bet365 and Playtech.

But a number of factors - including an increasing risk profile, the emergence of newly-regulating iGaming jurisdictions and greater local and international competition - are now combining in a way that is completely redefining the global landscape.

New jurisdictions are building regulatory frameworks for iGaming far more robust than anything on offer within Asia.

The most notable of these are in the US, where the repeal of PASPA has opened the door to legal online sports betting for the first time, with a number of states already live.

But this is very much a global phenomenon, where an economic downturn has led governments across the world to a conclusion yet to be reached in most of Asia: that it is better to regulate and tax online gaming than make futile efforts to outlaw it.

In Latin America, Colombia is live with a thriving online sports betting sector, while Brazil, Argentina and Peru are making steps in a similar direction; in Africa, the likes of Kenya and Tanzania are growing quickly; in eastern Europe and Eurasia, markets such as Georgia are being increasingly targeted.

The result is that many iGaming firms are shifting resources towards these new opportunities.

Take the example of platform provider SBTech, for a long time a strong performer in Asia, which in January appointed former Scientific Games CEO Gavin Isaacs as non-executive chairman in a clear pivot towards the US.

“Isaacs will use his extensive 20 years’ gaming experience across a series of senior management positions to further grow the company’s rapidly expanding US presence,” the firm said in a statement at the time.

Asian risk on the rise?

Attitudes to nature of risk in Asia have changed.

When the new wave of European regulation was introduced in the early 2010s, many of Europe’s largest, publicly listed operators withdrew from Asia entirely. Ladbrokes pulled out of China as early as 2010, with William Hill following in 2013. At the time, investors had little appetite for revenues from markets that were considered unsustainable.

But in the years since, we have seen a very different approach. Many have observed the impressive growth of GVC, a company which performed extremely well in grey markets, using that growth to land major M&A targets bwin.party and Ladbrokes Coral. Today, GVC is one of the world’s largest gaming operators in regulated markets.

Similarly, others have observed that white markets are not devoid of risk themselves; the reduction in stake for FOBTs in the UK is perhaps the most notable example of political and public pressure conspiring to deliver a hammer blow to operators within a regulated market.

“Diversification is the best way to mitigate risk,” one iGaming consultant based in Asia told AGB. “If you have a footprint in Vietnam, Cambodia, Thailand, China and Malaysia, having your website blocked in the Philippines is not necessarily a decisive blow.”

Looking at the region currently, of the major markets Malaysia and the Philippines remain the most politically uncertain. The biggest prize, China, has enjoyed a period of relative stability, even if operators are constantly playing a game of cat and mouse with authorities.

This is not to say the unexpected cannot have a major negative impact.

Last July, Playtech saw its share price collapse by 25 percent in a single day on the back of a profit warning which predicted Asian revenues for 2018 would be €70 million below expectations.

The warning singled out the Malaysian market, where Playtech has found itself under greater scrutiny as part of a government crackdown on online gaming.

However, digging a little deeper and it appeared that it was actually increased competition in China that was at the root of Playtech’s woes. It would also suggest that even against a backdrop of the globalization of iGaming, the Asian opportunity remains too big to be ignored.

Take NetEnt, another iGaming giant that has been among the first-movers in the US. Despite this push, the slots developer has also undertaken a major expansion in key Asian markets over recent months.

“Europe still has top priority, followed by North America and Asia,” the company says in its corporate strategy. “Focus on regulated markets but continue with dot. com as long as this is commercially viable.”

NetEnt CEO Therese Hillman has also recently pledged to “step up our efforts in the Asian market”.

AGB understands that over the past 12 months, many of the most successful European slot providers have made Asia a number one priority. These companies have enjoyed extremely strong growth by disrupting larger incumbents in regulated markets, and have now begun to implement the same strategy in Asia.

Despite the risks in Asia, its relatively low barriers to entry are particularly appealing. While the US is rightly generating a great deal of excitement, complex regulatory requirements fragmented across multiple states will likely rule out all but the largest companies.

For mid-sized firms looking for growth outside of Europe - particularly those with enough scale to mitigate some risk - Asia is a far more attainable goal.

“Yes, there are risks for iGaming companies in Asia,” the consultant based in the region told AGB. “But ultimately the opportunities are too big to ignore.”