23 minute read
FOCUS
Taking the N. Asian market pulse: Is Korea flatlining?
Covid-19, trade tensions and China’s battle against capital outflows have all had an impact on Asia’s gambling jurisdictions in one way or another, with some significantly losing their appeal and others showing surprising resilience.
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In this edition’s Focus section we look at the North Asian jurisdictions of Japan, Korea and the Russian Far East to see how they have fared.
Firstly we go to Japan, which had been counting on the Asian VIP market for about a quarter of its gross gambling revenue for its planned multi-billion dollar IRs. However, much has changed since the law allowing IRs was passed in 2018 and that sector of the market has been particularly hard hit. Spectrum Gaming’s Fred Gushin and Paul Bromberg take us through some of the key developments that have taken the gild off the VIP lily and suggest the course Japan may need to steer to ensure it doesn’t incur China’s ire.
Our second piece stays in Japan. While IRs are unlikely to open their doors for years to come, one gambling segment is quietly booming. Although online gambling is technically not legal, authorities turn a blind eye to the practice.
Betting on horse racing, motor boats and cycling is legal and there has been a gradual shift to betting online. So much so that the Google Play App store began offering real money sites for download in Japan from March.
The next North Asian market under the spotlight is South Korea. The jurisdiction was seen as highly promising and attracted high profile investment from global players such as Caesars Entertainment and Mohegan Sun. However, gradually the appeal has diminished as Covid and other geopolitical events highlighted the risk of foreigner-only markets. Caesars threw in the towel earlier this year and Mohegan is looking for financing. We look at what operators could do to adjust their offering and regain their lustre.
The third jurisdiction is the Primorye gambling zone in Russia’s Far East. The gaming hub has been slow to develop, however does appear to be gaining traction. A second resort opened last year and NagaCorp has said it’s on track to open its delayed property in 2022.
The first company to open its doors, Tigre de Cristal, is now part of the Suncity Group, via Summit Ascent, and its performance has shown significant promise.
The latter company has attracted attention from analysts recently, who see its access to Suncity’s database and close proximity to other North Asian markets as key draws. Covid-19 has undoubtedly had an impact on the region’s revenues, however, its casinos attracted support from local Russians who are allowed to gamble, supporting the operators in the absence of international travel.
Lastly in this focus section we change tack slightly to examine the latest trends in live dealer. It has been the most popular online vertical in Asia for many years, but as the field gets increasingly crowded, we ask what trends are emerging and what stands out in the pack.
Japan’s VIP challenge
Fredric Gushin* | Managing director, Spectrum Gaming Group
Paul Bromberg* | Senior vice president, Spectrum Gaming Group
VIP play had been projected to be a major segment of the potential overall Japanese gaming market, but a lot has changed since the law permitting integrated resorts was passed in 2018.
It was anticipated that international VIP play from China, Taiwan, Hong Kong and Korea would be the major feeder markets, with some studies estimating that the VIP market could constitute up to 25 percent of overall gross gaming revenues (GGR) in Japan.
It is important to note that the IR law prohibited the use of junkets in Japan. This was a significant mandate based on the past experience of other jurisdictions. The Macau government has historically permitted the services of junkets, but from a law enforcement perspective this has caused multiple concerns related to the infiltration of triad groups, pervasive money laundering and the explosion of the underground banking system in China.
In contrast, the Casino Regulatory Authority of Singapore decided in 2009 to permit junket operators, known as Independent Marketing Agents (IMAs), at its two IRs, but only under a strict licensing and operational regime resulting in only three IMAs having been licensed in total (with none currently licensed).
Junket ban
The Japanese government appears to have based the decision to prohibit junkets on the regulatory and law enforcement issues associated with junket operations. That decision has been validated by the recent inquiry held under the auspices of the New South Wales Independent Gaming and Liquor Authority into Crown Resorts, which documented serious breaches related to junket operations and anti-money laundering (AML) regulations at the Crown casinos in Melbourne and Perth.
Junket operators have demonstrated over the years that they are masters of circumvention in avoiding governmental efforts to regulate them. The Japanese gaming regulator, the Casino Regulatory Commission (CRC), and the Financial Intelligence Center (responsible for AML compliance) will have to be on guard to assure that junkets are not operating behind the scenes issuing credit to VIP players outside the traditional casino credit systems. Meanwhile events taking place in China will have a direct impact on the VIP market in Japan.
The length and severity of China’s anticorruption campaign, initiated by President Xi Jinping in late 2012, has surprised many analysts and political observers. The impact of the crackdown had a major impact in Macau but also has been extended to other jurisdictions that market to Chinese VIP players. Whereas the crackdown initially targeted junket operations in Macau, it then impacted the ability of junket operators to take Chinese VIP players to overseas casinos and now appears focused on those VIP players themselves traveling to casinos outside China.
Key VIP landmarks
Below is a summary of the key developments impacting the VIP market from 2015 to the present:
1. The Gaming Inspection and Coordination Bureau (“DICJ”), the Macau gaming regulator, introduced a number of initiatives to strengthen gaming regulation. One required that all new Macau junket licensees from 2015 provide full disclosure of shareholders, investors and key employees.
2. In December 2016 new controls were imposed on the amount of cash individuals using China-issued ATM cardscould withdraw from ATM machines in Macau.
3. Facial recognition technology and ID verification for cash withdrawals was deployed In May 2017 at ATMs in and around casinos and then extended to all ATMs in Macau.
4. China’s State Administration of Foreign Exchange announced that asof 1 September 2017 information would be collected on overseas transactions exceeding RMB1,000 (US$147).
5. In May 2016 the DICJ banned proxy betting in Macau’s casinos and required casinos and junket operators tofollow significantly stricter AML protocols.
6. The DICJ banned junket operators, with effect from 1 August 2019, from using Macau casino and VIP rooms as a base for cross-border settlement of VIP gambling services provided outside of Macau.
7. The DICJ also stated that any violation of local laws, or even of regulations in places outside Macau, could potentially affect the suitability of a junket operator in Macau.
8. Since the start of the Covid-19 pandemic, the Chinese government has stopped financial outflows by keeping its citizens from traveling overseas, thus ensuring a boost to the domestic economy.
9. In June 2020 the People’s Bank of China began tracking large-sum domestic cash transactions in an attempt to curb illegal transactions and make the movement of money even more difficult for junket and underground banking operators.
10. Around the same time, Chinese authorities arrested thousands of people suspected of being involved in crossborder gambling and there have been many official pronouncements against online gaming and those involved, as well as firms providing payment services to these entities.
11. China’s Ministry of Culture and Tourism established a “blacklist”of overseas tourist destinations in August 2020 that are targeting mainland Chinese customers for gambling purposes.
12. The Chinese government announced in December 2020 that the NationalPeople’s Congress had passed an amendment to Chinese criminal law so that, with effect from 1 March 2021, it became a criminal act punishable by a prison term of up to 10 years for any person or entity (such as an offshore casino) organizing or soliciting Chinese citizens to gamble overseas, while the penalties for serious breaches have also been increased.
Conclusion
Taken together it appears VIP play from China at Japan’s IRs will have to be re-evaluated in light of these developments.
VIP play is always risky from a regulatory and operational perspective. The CRC will have to ensure that VIP play follows the rules and that money laundering is not taking place. In addition, the IR licensees will have additional compliance responsibilities in terms of conducting periodic risk assessments and enhanced due diligence on VIP players including understanding the player’s true source of wealth. VIP play will still be an important component of Japan’s GGR but there will have to be aggressive marketing efforts related to the mass and premium mass markets. It is still a long time until the first IR opens and much can change in that time.
*Fredric Gushin founded Spectrum Gaming Group in 1993 after working 13 years for the New Jersey Division of Gaming Enforcement as Assistant Director and Assistant Attorney General. Gushin has led Spectrum’s Asian engagements for a variety of public and private sector clients. He is an expert on gaming regulation and anti-money laundering related to all forms of gaming.
*Paul Bromberg has been overseeing and conducting investigations in Asia since 1988. During this time, he has worked closely with various governments including law enforcement on gaming and other matters, including conducting probity investigations.
Online gambling sees quiet explosion in Japan
Largely ignored by the media and the policymakers, Japan has clearly entered an era of explosive growth for online and mobile gambling.
Like an iceberg that is only partially visible above the waterline, the only people who seem to be paying close attention are the businesses directly participating in the industry and the punters who are laying down their bets.
One recent signpost, however, was an announcement that Google Play app store will begin, effective March 1, offering real money gambling apps to be downloaded in Japan. This will make Japan the only Asian nation among the nineteen states globally where such apps will be offered.
Google’s support page specified four gambling categories that may be allowed in some jurisdictions: online casino games, lotteries, sports betting, and daily fantasy sports. In the case of Japan, it noted that real money gambling apps related to horse racing, motorboat racing, bicycle racing, and lotteries would be hosted.
Legal forms of online and mobile phone gambling are thus beginning to proliferate in Japan, and the industry is on a trajectory of sharp growth.
The shift toward online betting for horse racing, motorboat racing, bicycle racing has been underway for a number of years, with the proportion of revenues coming from this source gradually eclipsing the more traditional approach of heading out to tracks for the weekend and placing one’s bet.
Needless to say, the coronavirus pandemic accelerated this shift with stadiums often empty of spectators, but nevertheless with total sales commonly rising rather than falling.
The distribution of real money gambling apps on mobile devices will, in this sense, only entrench these practices even further.
Less easy to track are all of the international online casino sites now available in the Japanese language. They may be illegal, but the online advertisements are easy to find. The police would seem to have decided to turn a blind eye for the time being. Anecdotally, it’s not hard to assume that both the number of Japanese gamblers using these websites and the amount of money being wagered has also been on the rise.
These are social and business realities in this era, but not only does Japan not have any established policy framework to cope with them, there doesn’t even seem to be much of an appetite to discuss what might be the best approach.
This is hardly a surprise in an era where so much of Japanese politics is dysfunctional. This week the nation is debating about a failed former prime minister who apparently is too powerful to be fired even after embarrassing the nation before the world with overtly sexist comments, and the less noticed scandal of an incumbent prime minister who just declared in the national parliament that Covid-19 vaccine approval needs to be delayed because Japanese people are somehow biologically different from the rest of the human race, so new tests are necessary.
If that’s the level of politics, then it is no surprise that questions about whether or how to regulate online gambling have slipped through the cracks. One would hope, however, that at least in the universities and in the news media serious discussions could emerge.
Indeed, the passing of the IR legislation had seemed for a time to herald a more substantial debate in Japan about gambling addiction and the sorts of public policies and infrastructures that would be needed to address this long-ignored public scourge.
But even though the opportunities to gamble these days are not only at the pachinko parlor or at the race track, but increasingly right there in our own homes on our desktop, or even in our pockets on our mobile phones, the serious debate seems to have faded. Japan appears to be falling back into its old habit of ignoring things that are unsightly, uncomfortable, or which generate controversy.
One thing is clear. By the time that those three IRs open their doors later this decade, they will hardly make a difference for Japanese society as a whole. While watching those giant buildings go up at a few venues around the nation, the practice of gambling will have already silently slipped into most people’s pockets.
S.Korea loses allure, leaving projects in limbo
South Korea’s gaming market, which attracted significant interest when it first opened for foreign investors, is now seen as holding limited appeal unless the government agrees to relax its stance on local gaming.
Like all markets in Asia, it’s been hit hard by the pandemic, with properties facing rolling closures as caseloads have spiked. However, even before then it has suffered more than other foreigner-only markets around Asia.
A series of events has taken the allure off what was seen as a potential playground for Chinese and Japanese players, attracted by the K-pop culture that was taking Asia by storm.
An outbreak of Middle Eastern Respiratory Syndrome shut down tourism, in 2015, which was just recovering when tensions flared between Seoul and Beijing over the former’s decision to deploy a U.S. anti-missile defense system on its soil.
China retaliated by banning tour groups to Korea, resulting in a 33 percent decline in visitors from 2017 to 2020.
The outlook for the VIP market across Asia has also changed with China passing a law making it a criminal offence to lure its nationals to overseas casinos. And in 2018, Japan changed the game by voting to allow casinos, holding out promise for a potentially far bigger prize.
“The Korean gaming market has been impacted by Covid-19 more than most other markets due to its structure,” said Matt Landry, managing director of Strategic Market Advisors. “With negligible foreign visitation last year, the foreign-only casinos were limited to foreign passport holders residing in Korea. ”
“Now existing projects under development will find it more difficult, if not impossible, to be financed,” he added.
There is currently only one casino that is permitted to allow locals to gamble and that’s owned by Kangwon Land in a remote area of the country. It’s High1 casino in a normal year generates more revenue that all the other foreigner only casinos put together, clearly illustrating the potential from the national market. In 2019, it generated GGR of KRW14.81 billion, compared with KWR14.48 billion for all the other 16 combined.
“The government should move to strengthen the operating environment by considering policy changes, with the potential for domestic play being a specific and meaningful change,” Landry said. “ Because of the government’s financial interests in the industry and the controversial nature of the potential changes, they should lay out potential changes and find an independent third-party to evaluate the alternatives with deep expertise in the gaming industry.”
Ben Lee, managing partner of iGamiX Management and Consulting agrees access to locals would be a game changer, but doubts anything will happen in the short term given government concern over problem gambling.
“There are limited opportunities given the current geopolitical situation,” he said. “The potential upside is if they allow local gaming and that will only happen if Japan opens up.”
“The foreigner only market does not have much appeal. The AML laws are very tight and players can’t get money into South Korea. The cost to bring money in is about 10 percent and the casinos have to pay that.”
When South Korea asked for expressions of interest in 2015 for two new casino licenses in Incheon, close to the country’s main international airport, it received responses from 34 interested parties. However, that had dwindled to just six by the deadline and the government ultimately only issued the one license -- to Mohegan Sun for a $1.6 billion complex.
It was to be joining a $700 million project underway by Caesars Entertainment and a $1.1 billion joint venture between local operator Paradise Co. and Japan’s Sega Sammy, which broke ground in 2014.
To date, only the Paradise project has opened its doors and there are serious question marks over the other two.
Caesars pulled out earlier this year, with CEO Tom Reeg derisively telling analysts that it had sold its stake to Hong Kong-listed partner R&F Properties “for some barbecued pork.”
After merging with Eldorado Resorts, management has pivoted its attention away from international expansion to the U.S. market. In addition, the U.S. online gambling and sports betting market has opened up, which appears to promise more lucrative and less complex opportunities.
The South Korean Ministry of Culture, Sports and Tourism has given R&F a 12-month extension to the construction deadline, which was in March this year, less than the three years it had requested to finish the project.
The Midan City Resort Complex is expected to eventually include a casino, 750 hotel rooms, a theater, and a convention space once it is operational. Theoretically, the opening should come by March of next year, although there is currently no word on who the real estate firm may bring onboard to operate the casino.
Mohegan has also requested a six-month extension to its agreed June 2022 opening date and is known to be seeking partners to help finance the project. It’s currently about 15 percent towards completion.
However, CEO Mario Kontomerkos, a key proponent of Project Inspire, has said he’s stepping down. The company is now looking for a new leader, but whether the incoming management will view the Korean project kindly remains to be seen.
Unlike Caesars, Mohegan at the present time is still vying for a license in Japan, which it says will complement the Korean property.
Primorye projects saw “major 2020 progress,” officials say
Officials in the Primorye gambling zone have been on a public relations blitz in recent months, highlighting how projects are now pushing ahead and stressing there is no change in the long-term plans for 12 casino complexes.
The Deputy Prime Minister of Primorsky Territory, Konstantin Shestakov, said that the development of the casino entertainment district in his part of the Russian Far East made major progress in 2020 and is on a very positive trajectory.
Russian media has shown video images of infrastructure construction powering ahead, despite the frigid temperatures in Russia’s Far East over the winter months.
The zone, whose development is being overseen by the Primorsky Krai Development Corp., has been slow to ramp up. The first resort, Summit Ascent’s Tigre de Cristal, opened its doors in 2015, while Shambhala, owned by a Russian businessman followed last year.
A project by NagaCorp, which broke ground in 2016, ground to a halt in 2020 due to difficulties in bringing in Chinese contractors during the crisis. However, that has now restarted and the Cambodian-based company said it expects to complete the premises in 2022.
As of 31 December 2020, the hotel tower topping off for Naga Vladivostok was completed and construction of the casino podium was progressing up to level 2. Water and sewage systems connected to the development site were largely completed.
Despite the slow progress, the zone’s potential has peaked the attention of the investment analysts who follow Hong Kong-listed Summit Ascent.
In a recent note, Bank of America forecast that the stock has potential upside of about 135 percent.
The firm explains its optimism by saying that it will benefit from the deep database of parent company Suncity Group Holdings. However, local Russians are allowed to gamble and have provided significant support to the casinos in the zone during the crisis.
Once borders reopen, the zone is within about three hours flying time from Korea and Japan as well as the Northern China market. Phase 2 of the development will boost capacity, which will drive growth in the longer term.
While the gambling zone was initially envisaged as a hub to boost tourism, in particular the VIP market, in practice the local mass market segment has been one of the strongest performing. Again, it was a weak start with company officials complaining of illegal competition in the area. Authorities have taken action and appear to have had some success.
According to the government, the Primorye zone saw a 24 percent drop in resort attendance last year due to the pandemic, which is a far better performance than many others in the region.
In 2020, the number of Russian tourists to Primorye decreased by 14.8 percent, and foreign tourists by 56 percent. At the same time, the number of unique visitors to the zone amounted to almost 219,000 against 289,000 in the year before last.
The ratio of Russian and foreign tourists was 88 percent to 12 percent. There is also fresh data for two months of 2021 – out of 12 percent of foreigners, guests from China make up 5 percent, from Uzbekistan 4 percent and from other countries 3 percent of the total flow.
In terms of future expansion, both Summit Ascent and Shambhala are in second-stage planning. Tigre de Cristal’s next stage will involve investment of about $200 million and will double the group’s VIP and mass gaming tables when it begins to come online from 2022. It will also have twice the number of rooms and will add four restaurants and bars, more retail offerings, and an indoor beach club and spa.
According to a Goldman Sachs report based on a corporate day, the property will house 350 hotel rooms, 300 slots, 75 tables (20 direct VIP, 20 junket VIP, 35 mass) when Phase 2 opens. The company is eyeing the generation of more than US$200 million to $250 million in EBITDA by that date.
Shambala is also designing the second stage of construction - a hotel and entertainment complex with an area of 24 thousand square meters, up to 11 storeys with up to 270 rooms. The volume of investments will amount to over 4.5 billion rubles.
In addition, the officials from the development zone said there are currently three additional projects in the design phase and four remaining sites to fill.
Zone authorities are seeking to attract nongaming investors to fill out the remaining leisure offering. They foresee the zone incorporating a ski hill, as well as entertainment parks, golf courses and other family friendly leisure attractions.
Pandemic sparks live dealer innovation
The closure of physical casinos and suspension of sports tournaments in 2020 resulted in a banner year for live casino products. Experts believe that even as we return to normality, the live casino boom will be far from over.
"As a direct result of Covid, we are seeing and in my opinion will continue to see, a significant uptake in the online space,” comments Shaun McCamley of Euro Pacific Asia Consulting. “What we are seeing in this uptake is the need by players for more social interaction, this as a result of continued lockdowns and social distancing requirements many jurisdictions enforce.”
Live casinos aim to simulate the thrill of betting in a real-world casino environment, the croupier smiles as she deals cards, interacting with players using an in-built chat function.
McCamley pointed towards an innovative platform called Live Solutions, a B2B provider which operates “Casino Floor Live”, which is an infinitely scalable table games environment, with each table hosted by a live presenter. The players all get to video chat with each other and the host which creates social interactions and activity.
The tables can be hosted in any language and using any currency, with local presenters, speaking the local language, with local knowledge, working from home. It’s been described as “Zoom for casino”, according to McCamley.
“With many individuals in lockdown, craving social activity, the product seems to tick all the boxes and is already reporting very high demand from revenue-starved operators. Social isolation is going to be with us for quite some time, so the key message to operators is to act responsibly and look toward the long game,” he added.
QTech Games’ chief commercial officer Ulf Norder said that covid has been a prime accelerant in the trend towards digitalized entertainment.
“As the coronavirus closes casinos, live-casino products, in particular, have been thriving across Asia, delivering comparable gaming experiences from the comfort of players’ homes or on the move.”
Norder said that Qtech has used the period during the pandemic to bolster its existing live-dealer portfolio, including inking partnerships with Ezugi in February 2020 and Evolution in January 2021.
“Players are still eager to channel the visceral thrill of participating in a real-world casino, not to mention the chance for some long-delayed social interaction with the dealers themselves.”
“Speaking generally across the industry, a raft of Q3 and Q4 2020 results suggest a reversion to type, with products like poker declining rapidly, while live-dealer appears to be reliably retaining its audience, with newer habits progressively established.”
The pandemic has also sparked product innovation in the live casino industry.
Kfir Kugler, chief executive of live-casino provider Ezugi has seen a steady increase in popularity in “Live Casino Game Show” products over the course of the pandemic.
Live Casino Game Shows, as the name suggests, simulate a television game show. The croupier is effectively the show’s host - akin to a television presenter, and each viewer is effectively a contestant in the game show.
It mixes the thrill of betting in a live casino with television-level production.
One of the first entrants into the emerging product vertical was Evolution Games. Today, it has amassed one of the largest range of offerings, including Crazy Time, Monopoly Live, Lightning Roulette, Mega Ball, Dream Catcher, Deal, or No Deal Live, Lightning Dice, and Football Studio.
Playtech launched its “Adventures Beyond Wonderland” Live casino game show in November 2020 in the UK, which is based on an existing Playtech slot, but translating it into a new live experience. It is themed after the popular “Alice in Wonderland” story.
At the time of its release, Edo Haitin, managing director at Playtech Live said: “Today’s players demand innovative, experience-led content, and Adventures Beyond Wonderland offers that in spades. Taking a slot with an iconic theme, look and feel and bringing that to the Live Casino arena is a genuinely groundbreaking move… we believe Adventures Beyond Wonderland offers a uniquely enriched Live gaming experience.”
Its release was parallelled by Pragmatic Play around the same time, with their first entries into the growing Game Show market with titles including Mega Wheel in November and Mega Wheel Roulette in February.
As our industry moves towards digitization, this won’t be the last we’ll see of innovation from the live casino space.
