Asia-Pacific's bet on casino-fuelled economic growth

Billion-dollar integrated resorts are sprouting across the region. What will it mean for Singapore?
By Grace Leong, The Straits Times, 9 Jun 2015

THE Asian gaming industry is going through a shake-out as China's corruption crackdown and slowing economic growth are scaring off its golden goose from Macau - high-stakes Chinese gamblers.

But casino operators are betting that the downturn is temporary and that the drop in VIP gaming revenues will bottom out. Across Asia, the race is on to open more integrated resorts in the region.

By 2020, analysts say the Asia-Pacific region, including Russia, could see at least 17 casino projects coming online - six in Macau, three in South Korea and at least two each in the Philippines, Australia, New Zealand and Russia's integrated entertainment zone.

As for Singapore, it has seen its share of VIP gamblers shrink in recent quarters, but analysts do not see this rash of new projects coming onstream as a threat to the Republic. The market is big enough, they say.

The race to open IRs

WHY the boom in gaming projects in Asia? The answer lies in two words: Chinese customers.

Outbound tourism from China topped 100 million travellers for the first time last year.

Hong Kong and Macau remain the biggest beneficiaries of the travel boom, but North Asia, particularly Japan, has seen rising Chinese tourist flows due to the weaker yen and relaxed visa policies.

Macau's casino revenues fell for the 12th straight month last month, down 37.1 per cent to 20.35 billion patacas (S$3.4 billion), according to data released by Macau's Gaming Inspection and Coordination Bureau.

As China's graft probe expands, the slump in gaming receipts is expected to widen to 21 per cent this year from a 2.6 per cent drop last year - the city's first annual decline since records started in 2002. In the first five months, casino revenue has dropped 37 per cent to 104.3 billion patacas.

Thanks to the spillover of Chinese gamblers from Macau, South Korea and the Philippines will grow 16 per cent and 33 per cent respectively this year, said Deutsche Bank analyst Karen Tang.

For Singapore, even though some Chinese gamblers are shying away, its two casinos are still profitable, owing to steady mass gaming growth from Malaysia and Indonesia.

Macau is betting on new projects to stimulate demand, by appealing, for example, to a fresh fad for all things French among affluent Chinese. That's where Las Vegas Sands' US$2.7 billion (S$3.7 billion) Parisian comes in, with its half-scale replica of the Eiffel Tower.

There is also a US$1.5 billion Louis XIII casino resort, named after the French king who built the hunting lodge that eventually became the Palace of Versailles.

This strategy is based on the belief that the market can withstand additional supply as long as there is a compelling product.

South Korea is also getting into the game. Mainboard-listed Genting Singapore is in a US$1.8 billion joint venture with Landing Jeju Development to build Resorts World Jeju, to be completed by 2017. That is one of three new casinos in the works in South Korea.

The other two are Paradise City, a US$1.7 billion "foreigners-only" project, and a venture between Las Vegas-based Caesars Entertainment and Lippo Group for a casino near Incheon. Incheon Airport is also planning to develop an integrated resort, modelled on Singapore's Resorts World Sentosa.

But South Korea still has some way to go before it can catch up with Singapore. Last year, it generated US$2.4 billion in casino revenues, a little over one-third of Singapore's revenues.

As for another new kid on the block - the Philippines - its revenue reached US$2.5 billion last year, according to regulators. But it faces an uphill struggle to change its image.

Mr Thomas Arasi, president and chief operating officer of integrated casino-resort Solaire Manila, explained: "It is seen as a place that has safety and infrastructural issues. Manila also has certain issues with crime. It is not a challenge for the local market, more so for the VIP market.

"It's not easy to get people to come to the Philippines, but when they do, our sticky rate is as good as other properties because we give them the famous Filipino hospitality, convenience and reasonable (gaming) tax rates."

Japan is the unknown factor in this equation.

If it takes off, as several casino operators hope it does, it could be a massive market. With estimated annual revenues of between US$15 billion and US$30 billion, it could potentially be the second-largest market in Asia, behind Macau.

But attempts to legalise casino gaming in Japan have been delayed repeatedly by lawmakers concerned about addiction and organised crime. Companies such as Las Vegas Sands and MGM Resorts International are vying to win licences to operate casinos in Japan, but analysts have said it was already looking difficult to build resorts in time for the 2020 Tokyo Olympics.

Professor Asit K. Biswas, a visiting professor at the Lee Kuan Yew School of Public Policy, criticised the estimates as "outlandish", saying he has serious doubts that the Japanese market could hit those numbers.

"Where will the gamblers come from, and how will they get the money for gambling? The Japanese banks already have good money-laundering measures in place and these will only become tighter with time," he said.

Singapore's response

MANY industry experts do not see the rash of new integrated resorts as a significant threat to Singapore's gaming industry.

"It is unlikely that new entrants to the casino market in Japan, Korea, Cambodia, Vietnam or the Philippines will significantly cannibalise the Singapore market. The biggest threat to Singapore would likely be if Thailand or Indonesia were to legalise gaming, but that is unlikely to happen in the near term," said Mr Paul Bromberg, CEO of Spectrum Asia, a regional gaming consultancy.

"Just as Macau, Japan and Korea are too far away to have a major impact, I suspect visitors will continue to visit the IRs in Singapore for the same reasons as before: The IRs are easily accessible, the general environment is clean and safe, they offer a truly diverse entertainment and hospitality experience, and patrons can trust and enjoy the gaming experience," he said.

Mr Vitaly Umansky, global gaming senior research analyst for Sanford C. Bernstein (Hong Kong), concurred, saying that most of Singapore's gaming revenue is generated from South-east Asia.

"The risk is greater legalisation around South-east Asia," he said.

"But Indonesia is not going to have gaming. Malaysia is not going to have increased gaming. Vietnam is a giant question mark and doesn't have that many players. So you are left with only Singapore and Malaysia, and Chinese individuals living in Indonesia. That's really the source market for Singapore.

"If it can dig more into the Indian subcontinent, there'd be some significant demand coming out of that area. But with MBS operating at 99 per cent, it is hard to bring more players in. Singapore will remain a saturated duopoly market."

Even if competition is still not as dire as some make it out to be, there is no denying gaming revenue growth in Singapore has stagnated, analysts say. Would a third IR help Singapore regain its mojo?

Industry experts say there appears to be little support among Singaporeans for a third IR. Neither does the Government seem to have any plans in the offing, going by comments from Senior Minister of State for Trade and Industry Lee Yi Shyan in Parliament last month, even with the moratorium on such licences ending in 2017.

Also, the economic case for a third IR has not been made.

Prof Biswas said: "It would be advisable to see how gambling does in Macau and Japan by the end of 2016. If the takings decline even further from the current levels, a third IR in Singapore would not be a wise policy."

Barclays economist Leong Wai Ho said that the two IRs should be permitted "to expand or change concepts if needed", rather than building a third one.

Singapore put in place a 10-year moratorium on new casino licences in 2007 following the two awarded for the Marina Bay and Sentosa sites.

The two casinos were granted exclusive rights in Singapore from 2007 to 2017, partly so that their operators - Las Vegas Sands and Genting Singapore - could get a head start in recouping their investment.

Responding to a question in Parliament last month from Workers' Party Non-Constituency MP Gerald Giam on whether the Government had received any requests from existing or new casino operators to issue more licences after 2017, Mr Lee reiterated the Government's stance of working with the existing operators to improve their offerings.

But rising regional competition is one factor Singapore has to consider, a spokesman for the Ministry of Trade and Industry (MTI) told The Straits Times. The Government's current priority is to work with the existing IRs to ensure that their offerings remain internationally competitive and continue to meet Singapore's needs, the MTI said.

The IRs contribute about 1.5 per cent to 2 per cent of the Republic's GDP.

Mr Umansky noted: "The drop in Chinese visitation is more cyclical than structural. If you want to drive more visitation to Singapore, give the gaming operators more capacity, more hotel rooms.

"The biggest problem in Singapore is a lack of hotel rooms. If MBS can build another 3,000- room hotel next to it, it will be able to increase Mice (meetings, incentive travel, conventions and exhibitions) and retail businesses. Even now, gaming visitors to MBS have to stay at other properties."

As important as it is to have world-class Mice facilities, Singapore also has to ensure it can keep up with the capacity and has the infrastructure to support its Mice and tourism sectors.

Gaming operators themselves now also recognise that casinos alone do not necessarily bring additional visits and have stepped up efforts to offer more innovative retail and family-oriented entertainment.

So, rather than build more IRs, perhaps Singapore can look closely at how to beef up its non-gaming offerings.