FOCUS

Making money in the Mekong

A quick look at the macro-economic figures of the Mekong region clearly shows why there is so much interest in the tourism and gaming potential.

Cambodia, Vietnam, Thailand, Myanmar and Laos have seen their populations grow from 233 million a decade ago to an estimated 262.5 million this year - an enviable and steady rate at a time when many nations are experiencing declines amidst an aging population.

This potential consumer base is also increasingly wealthy, with the income levels of residents in the region rising to an estimated $3,475 a head this year from just $816 in 2000.

In terms of gaming, Vietnam introduced new regulations to cover casinos in 2017 and sports betting a year later, triggering a steady stream of investment, including the $4 billion Hoiana resort, which will open later this year.

Cambodia is also expected to soon reveal its new gaming regulations, while Myanmar recently passed legislation that will officially allow casinos. Laos has the Savan Legend property and its owners, Macau Legend, are embarking on an expansion to add facilities, such as a new golf course and more VIP gaming. The operator is also in talks with the government over other potential resort projects in the country.

Only Thailand has steadfastly maintained its opposition to IRs, although analysts expect that it will eventually also open its doors.

In our Mekong edition of the magazine, the focus is therefore on some of the issues facing investors in the region, coupled with the market’s potential.

Our first article looks at financing. Although returns from projects in the Mekong region can be high, there are also significant economic and political risks from investing in emerging markets. As a result, raising capital can be an issue and often requires a strong stomach. We look at some of the key challenges.

Our second article focuses on Thailand, both in terms of the opportunities if that country legalises gaming, as well as the growing importance of the Thai gamer in the region’s casinos.

Thai’s have long-been the key target audience of many of Cambodia’s border casinos, though now, as income levels rise, they are making up a significant portion of VIP revenue in many regional properties. As a result, many are positioning themselves to attract these wealthy individuals.

For our last article in the focus section, we take a look at some of the IRs already open in the Mekong and assess their fortunes. While some are undoubtedly doing well, many have faced considerable challenges. We ask regional experts their views on the recipe for success.

Navigating Indochina’s investment risks

Indochina’s casino markets continue to present robust growth, providing significant investment opportunities for operators with a strong appetite for risk, but they are also likely to need deep pockets as established capital markets are wary of these grey jurisdictions.

Given double-digit growth in gaming revenue across the Indochina region, which outpaces major markets such as Macau and Singapore that are facing low gains to declines, the appeal for investors is high,” says Margaret Huang, global gaming and lodging analyst for Bloomberg Intelligence. “For instance, Vietnam, which rolled out new regulation to cover its casino and sports betting industries a couple of years ago, has witnessed an influx of overseas investment.”

Governments in Indochina do not provide annual figures for gross gambling revenue, though Cambodia has said it collected $46 million in casino taxes last year and it expects that number to jump to $70 million in 2019, giving an indication of the growth rates.

A handful of IRs and casinos have sprung up across the country, while Phase 1 of the ambitious $4 billion Hoiana project, near Da Nang, is due to open this year. Meanwhile, neighboring gambling hub Cambodia has issued over 160 casino licenses, the majority of which have been used to open Chinese-owned and -backed properties in Sihanoukville.

However, finding the finance to construct these resorts is no easy task.

“The opportunity to raise money in the formal sector via debt or equity from public markets globally are few and far between, there simply isn’t the appetite from big investors outside the industry,” said a long-term investor in Indochina who is currently raising finance for a project. “From within the industry established players do not appear to have too much of an issue raising the cash e.g. Sun City Group at Hoiana.”

He said many of the projects are self-financed by large local conglomerates which have cash and whose subsidiaries provide services.

Outside of these two models is a much more informal sector, with many wondering where the millions are coming from to build resorts in Sihanoukville, Poipet, or Bavet.

Those that do succeed will be paying premiums of 300 to 350 basis points to account for the risk in Indochina, Huang adds.

Grabbing a slice of the action doesn’t come cheap in Vietnam, for example. To qualify for a casino licence there, foreign investors have to total stump up total investment capital of $2 billion. The threshold was previously set at $4 billion in the draft bill. While $2 billion certainly isn’t small fry for many regional operators, the international casino giants are more turned off by the lack of robust regulation in the region. The likes of Laos and Cambodia don’t have explicit and comprehensive regulations covering gaming, although a long-awaited regulatory framework is due soon in Cambodia.

Indeed, Indochina could be described as various shades of grey. “With the exception of Vietnam – and even those regulations are lacking – there is no gaming regulatory acts in place,” says Shaun McCamley, managing partner of Euro Pacific Asia Consulting and a 40-year veteran of the gaming industry. “So, for investors it’s a real risk coming into these locations, and certainly for publicly listed companies, the lack of a transparent audit process is a real issue that they cannot overcome. The attraction is the perceived opportunity to make substantial revenues, and that is simply not the case.”

A fellow Asia-based consultant, speaking on the condition of anonymity, tells Asia Gaming Brief proper regulation would instantly make Indochina more of a draw for global investors. He says: “If these locations could get their acts together, which is not likely to happen in my lifetime, they would become much more attractive to a greater number of investors. For a US company it would be very difficult for them to operate in an environment like Cambodia, Laos or Vietnam where corruption is a daily way of life.” He adds: “I think the biggest risks [for investors] are bribery and corruption, political influence and a lack of a properly regulated industry.”

These problems, however, haven’t stopped regional operators and Chinese investors from flooding into Indochina, especially Cambodia. Other what you could call ‘safer’ markets like Macau have their own challenges and risks, such as higher barriers to entry and fears of not securing a new license in the Portuguese colony beyond 2022 when operators and investors have pumped in billions of dollars already.

“IRs in Asia have shown they can generate very fast payback periods, but that is because investors require quick ROI because of the exogenous risks that exists for those types of investment,” says Huang.

Operators eye Thai potential

Thailand’s ongoing ban on all forms of gambling is proving a gold mine for casinos elsewhere in the region, with a growing number taking steps to specifically target the Thai VIP base.

Renowned economist Pasuk Phongpaichit, an economics professor at Chulalongkorn University in Bangkok, estimates that 70 percent of the country’s adult population gamble regularly.

New generations are also showing an interest. A poll last year by U-Report found that more than half of 2,280 teenagers in the country would be willing to use their own money on a betting website, even though online gambling is not permitted.

As long ago as 2013, the Bangkok Post was reporting that the “underground gambling economy” was larger than the national lottery, which was introduced in 2003 and sits alongside domestic horse racing as one of only two ways to gamble legally in the country.

Sharp growth in mobile and online gambling is also inevitable given the increasingly tech-savvy nature of Thailand’s population.

Internet penetration has rocketed by nearly 250 percent in the country over the past six years and the Global Digital Report 2019 ranked the country at No.1 for mobile banking, No.2 for cryptocurrency ownership and No.3 for mobile commerce.

The lack of casinos in Thailand has led to opportunities for neighbouring markets that embrace such facilities, especially as, according to the World Bank, the number of trips abroad by Thai nationals has doubled over the past 10 years.

Visanu Vongsinsirikul, a lecturer in Economics from the College of Innovative Business and Accountancy at Dhurakij Pundit University in Thailand, says that most VIPs from Thailand “prefer to gamble in Macau, Singapore and Australia.”

Around 15,000 visitors per month visited Macau from Thailand last year, although the number has dropped by nearly one quarter since 2016.

Meanwhile, growing casino markets like Vietnam have experienced a surge in tourists from Thailand. According to official government statistics, visitors arriving in Vietnam from Thailand in the first six months of 2019 rocketed by 145 percent year-on-year to 245,000 – a higher rise than any other country.

Traditionally, Thais have flooded across the border to dusty Cambodian border towns, such as Poipet to gamble. Though, improved transport links and a higher standard of new properties coming online is attracting a different clientele.

Donaco International hired five Thai junkets last year to target VIPs for its Star Vegas property in Cambodia, while Macau Legend’s Savan Legend property, a short drive over the border into Laos has a website in both English and Thai.

Savan Legend reported a drop of HK$4 billion for 2018, with gross gaming revenue of $224 million. It said a total of 185,700 of its guests had crossed the Savan-Mukdahan border from Thailand.

The resort is being expanded to add a new hotel wing, a pool, spa and gaming facilities, while Macau Legend is exploring further expansion opportunities in Laos.

Malaysia’s Genting also recognizes the potential, opening a marketing and public relations office in the Kingdom in 2016.

In the Cambodian border city of Poipet, 95 percent of tourists are from Thailand. According to Forbes, in a good year up to $400 million in revenue has been generated across the city’s casinos.

“I think the number of Thai VIP gamblers is slightly increasing because of the increasing income, on average, and the exchange rate appreciation,” Vongsinsirikul adds. “Around 95 percent of Thai VIP gamblers love to gamble on baccarat.”

However, there appears to be little prospect of Thailand’s political establishment opening up to casinos imminently.

When an attempt was made to push through casino legislation four years ago, Prime Minister General Prayut Chan-O-cha insisted that casinos would not become a reality on his watch. In June 2019, he secured another term.

Moreover, the authorities are continuing to crack down on illegal operations, rather than turn a blind eye. During the 2018 Fifa World Cup, about 10,000 people in Thailand were arrested for gambling on the football tournament, according to Deputy Police Commissioner General Chalermkiat Srivorakhan.

Vongsinsirikul is confident though that, perhaps a decade from now, there will be a legal casino in Thailand.

He believes that a potential casino model that is similar to the UK would work well in Thailand, with “not as many” casinos as Macau, but also venues that are not necessarily linked to entertainment complexes, such as in Singapore.

That said, Thai travel preferences certainly indicate there may also be demand from Thai gamblers for an Integrated Resort (IR) casino like Marina Bay Sands in Singapore.

Although Marina Bay Sands says that it does not track the nationalities of all visitors to the IR, the city-state welcomed 546,000 visitors from Thailand in 2018 – a 2.7 percent year-on-year rise – and Thai nationals “make up a meaningful segment” at the resort, according to president and chief executive George Tanasijevich.

However, Tanasijevich, who is also managing director of global development at Las Vegas Sands Corp, acknowledges that Thailand would be an “ideal location for a Las Vegas Sands MICE and entertainment-focused IR.”

Whilst insisting that “the people of Thailand will decide” when the time is right to enter the increasingly competitive casino market in Southeast Asia, Tanasijevich would favour “a central location in Bangkok near other tourism attractions, hotels and the Central Business District.”

He says: “This would maximise convenience for tourists and the opportunity for existing businesses to benefit from the economic growth generated by our IR.”

Tanasijevich also says that, like any operator seeking to establish a base in Thailand, it would be essential to operate “in a manner that is respectful of local culture and adequately addresses any social and religious sensitivities.”

The opportunity to use such resorts to drive high-spending tourists is difficult to ignore, even for a country that already pulls in nearly 40 million foreign visitors annually.

“Casinos represent a small portion of our properties, typically less than 3 percent, but serve as a significant means of attracting foreign tourists to the markets where we operate,” Tanasijevich says.

“We aspire to develop an IR in Thailand that includes a casino that allows open access to foreign tourists and restricted access to Thai people. If granted this opportunity, foreign tourists would be the primary target customer.

“The addition of a Las Vegas Sands IR would significantly strengthen Thailand’s ability to attract substantially more high-value foreign tourists and grow an industry that is critical to the performance of its economy.”

On a winning streak

Over the past 20 years, parts of Indochina have become a real hotbed for casino gaming. Yet while this corner of Southeast Asia can be a challenging environment and not a guaranteed license to print money, certain casino operators have struck gold there. Arguably two of the region’s biggest winners are Crown International Club in Danang, Vietnam and NagaWorld in Phnom Penh, Cambodia.

So how have they managed to do so well? If we take Crown International Club first, this property’s number one asset is that it is situated in a desirable location on Vietnam’s coast, less than seven kilometers from Danang International Airport. The country’s third busiest airport offers scheduled direct flights to and from major cities across Asia, including Bangkok, Tokyo, Singapore, Seoul, as well as nine destinations in Mainland China.

Junkets also lay on regular charter flights for VIPs from China to Danang, where they are greeted by warm weather, sandy beaches and luxury relaxation away from the tables. “The reason why Crown has been successful is that the hotel is in a beautiful spot like Danang and 20 minutes from a very big airport with flights everywhere and many flights from China,” says Tim Shepherd, director of Fortuna Investments. “There is no proximity to market, but you have got fantastic air access into Danang.”

First opened in 2010 under the name Silver Shores and positioned adjacent to Crown Plaza Hotel, Crown International Club has also enjoyed a certain degree of market exclusivity. Yet the property will soon have a worthy competitor when the Hoiana project 40 kilometers south of the airport is completed. The first phase is slated to open this year and it will be interesting to see if this US$4 billion luxury IR will prise away Crown’s international high rollers.

NagaWorld, on the other hand, hasn’t had to worry too much about nearby rivals stealing its players as no other casinos are permitted by law within a 200 kilometer radius of Phnom Penh. This monopoly goes a long way to explaining why the NagaCorp-owned casino, which from 1995 to 2003 operated from a boat moored on the Mekong River, grew into Cambodia’s largest casino and one of the world’s most profitable gaming properties. It also made its founder, Malaysian businessman Chen Lip Keong, a billionaire. “A monopoly license in Asia is obviously rare,” says Shepherd, “so when you get a monopoly that’s enormously helpful.”

The nearby $700m Naga 2 property flung open its doors in 2017, while the ambitious US$4 billion Naga 3 project is earmarked to be ready by 2025. Last year, Naga 2 helped the NagaWorld complex to post net profit of over US$390 million – a 53 percent increase over 2017. Gross gaming revenue leapt 55 percent to US$1.4 billion in 2018. Hong Kong-listed NagaCorp attributed much of the rise to an influx in VIP gamblers and Chinese tourists. NagaWorld also benefits from the fact Cambodia’s capital is home to a sizable expatriate population from China and Malaysia.

“Perhaps Naga’s greatest strength is that their management team understands the wants and needs of their customers,” says Andrew Klebanow, senior partner at Global Market Advisors. “Naga offers a great gaming, dining and entertainment experience, while for mass market customers, its lodging, dining and gaming are priced lower than Macau. For junket promoters, Cambodia’s low tax rate allows Naga to offer a more generous commission structure than Macau while providing players with an equally luxurious lodging experience.”

NagaWorld and Crown International Club are magnets for gamblers from China due mainly to the accessibility by air, though the same can’t be said for Grand Ho Tram in Vietnam’s Ba Ria-Vung Tau Province. Opened six years ago, the opulent beachside resort is more than 110 kilometers by road from Ho Chi Minh City’s airport, making it an unappealing destination for certain overseas VIPs. “While a stunning property, the Grand Ho Tram Resort has, and always will, suffer from a relatively poor location,” says Klebanow.

“It is a miserable two-and-a-half-hour drive from Tan Son Nhat International Airport and while an improved highway will eventually reduce travel time, it will always be at least two hours away from Ho Chi Minh City.” Furthermore, Vietnam’s first IR wasn’t an immediate beneficiary of the country’s pilot program permitting locals to gamble. If and when Grand Ho Tram can accept Vietnamese gamblers, the property will face stiff competition from casinos in Bavet on Cambodia’s border for a share of the greater Ho Chi Minh City gaming market.

MGM Resorts walked away from managing the property in 2013, choosing instead to focus on markets like Macau, Taiwan and Japan. Indeed, despite Indochina becoming a casino resort hotspot, the major international operators have tended to stay away. This is partly due to the fact projects lack scale, while the prospect of a casino in isolated border towns in Cambodia, Laos and Myanmar means you are reliant upon gamblers crossing frontiers. And what happens if Thailand did ever decide to legalize gaming?

In addition, bureaucracy, corruption and lax regulatory frameworks can be a deterrent.

“The vast majority of public companies will not enter a market without a robust regulatory regime,” Klebanow states. In Cambodia, where a staggering 163 casino licenses have been issued, regulation is coming, yet first-mover advantage has been key in gaming hubs like Poipet where, says Shepherd, the likes of Star Vegas, Holiday Group and Crown Group have done “extremely well.”

Assessing the region more broadly, he concludes: “Winners I would narrow down to those who opened early, opened proximate to a big market, or got a monopoly. The losers are the ‘me-toos’ who built later and with no real USP, or built in a market with no access to players.