PHILIPPINES

Competition adds to Covid woes

Operators in Entertainment City had already begun to complain about the impact of rising competition on their margins even prior to the Covid-19 crisis.

Now, with the outlook highly uncertain due to border closures and the erosion of the VIP sector, they may have to contend with three new developments pressing ahead.

The Westside City project, which has now come under the control of Suncity Holdings Group, was always on the cards and is progressing, with the local unit announcing it had raised PHP12.9 billion ($268.6 million) to finance development.

However, in late 2020 Hong Kong-listed International Entertainment said it had received provisional approval for a new license from the Philippine Amusement and Gaming Corp (PAGCOR). The company runs the New World Manila Bay Hotel and Casino and has said it wants to upgrade the property into an integrated resort.

In November, Waterfront Philippines said it had won a Supreme Court battle forcing PAGCOR to issue a long-stalled license for its proposed development, which it first applied for in 2008.

Neither of the latter two licensees have made much public about their plans, or the likely time frame for development. However, with gambling revenue unlikely to reach pre-pandemic levels before the second half of 2022 at the earliest, there is concern over how much competition the market can support.

“It’s difficult to gauge the demand of the industry now that we are in a very difficult situation,” said Richard Laneda, an analyst with COL Financial. “We also do not know the timing of these new resorts and their respective sizes. Nevertheless, I believe in the short term this will increase competition in the area and will lead to some market share being taken from existing IRs. This will also lead to some margin erosion. But history shows that new IRs are able to grow the pie over the long term.”

Prior to the pandemic, the Philippines had been one of the fastest-growing markets in the region, driven by rising tourism and underpinned by a strong domestic market. In 2019, gross gaming revenues rose 15.4 percent to nearly PHP216.39 billion (US$4.28 billion). While the IRs in Entertainment City accounted for about three quarters of the total, growth had actually been faster in the regions.

Melco Resorts & Entertainment CEO Lawrence Ho has been warning for several years about the impact of rising competition in the capital. While PAGCOR Chair Andrea Domingo had promised in 2017 that there was a moratorium on news licenses for five years to protect the investment of existing licensees.

Industry commentators said they still see a bright future, but operators may need to reassess their business models and be aware of the potentially shifting goal posts.

“At the moment we are involved with several projects in the Philippines and we are strongly urging developers to reconsider their number of Junket rooms and to lower their expectations with the related revenues, and to consider a much more rounded gaming floor offering with the focus on mass and premium mass, as Macau is now doing, large sports books, vibrant stage shows, and a multitude of gaming floor F&B outlets,” said Scott Feeney, CEO of Gaming Concepts Group. “We recommend that gaming floors have a much larger overall entertainment and F&B footprint to cater for the locals to offset the expected lower numbers of Junket groups in general and obviously the lower numbers of international visitors, both tourists, business travellers, conferences and even those simply visiting for pure gaming.”

It’s difficult to gauge the demand of the industry now that we are in a very difficult situation.

“We know of developers with licenses in hand that have slowed down their timelines, but we think now is the time to be ferociously building and renovating to be ready for the surge when it eventually comes.”

Feeney also points to the risk of rising competition such as is being faced in Entertainment City.

“A major concern that all potential developers need to recognise quite clearly, is that there are no restrictions on licenses being issued, as we have seen in Clark for example with upwards 12-13 licenses, so this must always be taken into account. The balance between increasing revenues and how many operators will be sharing it makes things very competitive.”

Joe Pisano, CEO of Jade Entertainment, said he doesn’t see revenue returning to 2019 levels before 2023, but says the potential is intact.

“The Philippines remains a very strong growth market over the next 5 years, with 105 million in population the market is far from saturated and it will be great to see more regional development,” he said.

That said, David Green founder and principal of Newpage Consulting sounds a note of caution and points out that there remains a high level of sovereign risk from operating in the Philippines. Potential risks range from the shifting sands of PAGCOR regulation, to Sino-Philippines relations through to capricious decisions from its president.

“I think these are issues which rank ahead of the ordinary commercial risks of market saturation, and cannibalisation vs overall growth,” he said. “Proliferation will become a social issue to a greater extent as new operators will no doubt look at inducements to win both new gamblers, and patrons of competitor casinos.”

POGOs win tax battle, but maybe not the war

Philippine Offshore Gaming Operators (POGOs) have won a reprieve from a punishing franchise tax, which may reduce departures from the country, but uncertainty over business conditions remains high, industry insiders say.

The Supreme Court earlier this month ruled 13-1 in favor of 14 petitioners from the industry who argued that the provisions of the tax are “patent violations of substantive due process and equal protection of the law and are oppressive and offensive not only to the petitioners, but also to other foreign corporations who are subject to their provisions.”

Those filing the petition included Oriental Game, Golden Dragon Empire, Riesling Capital and 11 others, as reported by Rappler.

The court put a temporary restraining order on the collection of the taxes, which the Bureau of Internal Revenue has acknowledged and said it will respect.

The 5 percent franchise tax, imposed on gross bets, was the final nail in the coffin for many POGO operators already struggling due to Covid-19-mandated closures. The government had been seeking to double revenue from the sector to pay for recovery efforts from the pandemic.

Only 35 POGOs have resumed operations, out of 61 prior to the crisis.

While welcoming the Supreme Court decision, industry participants pointed out that the stay is at present only “temporary” and business conditions remain highly uncertain.

It may encourage those who have not already left to rethink their plans, but won’t be enough to encourage any to return.

“I believe the Philippines government is trying to stop the bleed or exodus of the POGO operators leaving the country,” said Danny Too, general manager of Cherry Interactive. “They have also come to a realization that the 5 percent turnover tax is a suicidal move, akin to killing the golden goose.”

“I personally think that it is a little bit too late as many Chinese operators have shifted their focuses to different locations / countries and thus, it would not be easy to salvage the situation efficiently.”

The main concern for the industry is that the tax was imposed on gross bets, rather than revenue, which makes it almost impossible to turn a profit.

The government had been hoping the measure would yield an extra P17.5 billion for the coffers.

Despite the exodus of POGO operators fromthe Philippines, Andrea Domingo, chair of the Philippine Amusement and Gaming Corp. (PAGCOR) claims the sector is recovering well.

In a recent interview with Asia Gaming Brief, she estimated that by the end of 2020, PAGCOR would have made P33-34 billion pesos ($685.4 million – ($706 million) despite being only open for four or five months and by the second quarter of 2021 would be doing as well as 2019.

Bromhead Holdings, which offers outsourcing and consulting services to the gaming industry, also said it has seen renewed signs of life in the sector.

“Whilst there undoubtedly has been an exodus of POGOs from the country recently there is still an active market and the POGO is far from finished,” said Bromhead Chief Operating Officer Mae Javaluyas. “We have fielded a number of inquiries recently from both operators and service providers either looking to come to the Philippines or re-establish existing businesses here.”

As well as direct revenue for the government, the sector was also providing significant support for other areas of the Philippine economy, accounting for a significant portion of Manila’s real estate industry.

David Leechiu, chief executive officer of Leechiu Property Consultants told local media that POGOs left 300,000 square meters of office space unoccupied last year or 20 percent of the total.

He said he expected the Supreme Court reprieve to stem the exodus, which may have meant another 200,000 to 300,000 sq.m would have been lost in the next six months.

In an attempt to rein in illegal gambling and to boost revenue, PAGCOR announced in December that it would allow locals to gamble online. Land-based casinos will be able to accept bets from VIP players only, while a unit of DFNN has also been awarded a license.

BoA upbeat on Westside City prospects

Bank of America/Merrill Lynch has added its voice to other recent commentary pointing to significant upside for Summit Ascent due to optimism over its projects in Russia and the Philippines. Westside City in Manila is expected to have 400 tables, 400 rooms for the casino hotel and 1,200 slot machines.

In addition, Westside/Megaworld will develop a further 2,000 hotel rooms. The firm sees strong local markets and a good location to help the resort to generate GGR of HK$9.6 billion in 2024 and EBITDA of $1.9 billion. It adds this estimate may be conservative as its 37 percent less than Bloomberry Resorts’ Solaire, which is slightly smaller in scale.

Razon leads push to bring Moderna vaccine to Philippines

Bloomberry Resorts CEO Enrique Razon is spearheading efforts to bring Moderna’s coronavirus vaccine to the Philippines, consolidating orders from the wealthy class, business organizations, and other interested parties.

Razon is also chairman of International Container Terminal Services Inc and has been in talks with Moderna to bring in the vaccine, which may be delivered from May to August, the Philippine Star reports. The company’s charitable arm also recently announced it was sponsoring the construction of the first hospital in San Andres, Quezon.