Tuesday, September 27, 2022

Australia firms' experience highlights risks of Asia markets

In recent years two companies, Donaco International and Silver Heritage, listed on the Australian Securities Exchange with the high ambition to crack the Asian casino market. However, as the new decade begins, both of these firms face deep crises. To what extent did they fail in the face of common challenges?

In Asia Gaming Brief’s investigation of this question, it became clear that we needed to grant our various sources anonymity, as there is a widespread perception that future litigation could yet arise in one or both cases.

Donaco International listed on the ASX in February 2013 and Silver Heritage followed considerably later, in August 2016. Both firms began with strong business connections in Vietnam, the Lao Cai International Hotel (later the Aristo International Hotel) in the case of Donaco and the Phoenix International Club in Bac Ninh in the case of Silver Heritage.

While the problems that beset Donaco and Silver Heritage were various and often unique, there do seem to have been common themes that emerged.

The strongest consensus is problems arising from the choice of local partners.

This was particularly the case with Donaco’s January 2015 acquisition of the Star Vegas Resort & Club in Poipet, Cambodia. In the view of several close observers, partnering with Thai politician and businessman Somboon Sukjaroenkraisri was a disastrous move for the firm from the outset.

Under the initial deal, Somboon retained management of Star Vegas, and before long he built two new casinos in its immediate vicinity, drawing away needed business. When Donaco tried to pull out of the management arrangement in 2017 and accused Somboon of violating the non-compete clause of the sale agreement, this led to a long and costly legal battle that the film could ill afford.

In the view of at least one observer, Somboon effectively destroyed Donaco’s business in Poipet and is now mopping up its remaining assets.

Silver Heritage too faced critical problems with local partners and agents, as well as some simple bad luck.

The centerpiece of the firm’s short history has been its effort to build and to operate the Tiger Palace Resort Bhairahawa in Nepal, about eight kilometers from the border of India. Construction began in late 2014, and then in April 2015, a major earthquake struck Nepal, costing the firm about six months of additional construction time, and stretching the firm’s financial resources.

Silver Heritage, too, had a legal dispute with its original local partner, in this case a man named Rajendra Bajgain.

But the blows kept coming. In February 2019, Silver Heritage lost its casino operations contract for the Phoenix International Club, costing the firm about 45 percent of its revenue just as it was trying to dig its way out of the overspending on the construction of the Tiger Palace Resort. Finally, the Covid-19 closures at the beginning of this year pushed the struggling firm into insolvency.

Another common challenge faced by both Donaco and Silver Heritage related to the sometimes conflicting imperatives of being listed firms with their associated obligations in terms of legal compliance and shareholder oversight, versus the often rough-and-ready, poorly regulated jurisdictions in which they were trying to operate.

The qualities needed for success in these two disparate worlds were often two very different skill sets, and the number of people who cross comfortably between them were few indeed. Both firms would have benefited greatly from having a larger core team—with the requisite skills—and that could deliver on-the-ground loyalty to the companies’ management.

As one observer noted, listing on the ASX may have carried along with it certain advantages, but among these advantages was not any inherent ability to be able to compete and win in these weakly regulated jurisdictions. While the opportunities for enrichment were real, so were the risks that the companies’ leaders would find themselves unable to mould the local business environments to their own advantage.

Finally, the relatively small sizes of Donaco and Silver Heritage, especially in the financial sense, meant that when they did hit rough waters—whether they be in the form of natural disasters, problematic partners, or underskilled local agents—they could not easily right the ship and sail on. 

Indeed, these firms may have chosen to list on the ASX in the first place because, had they listed on, for example, the Hong Kong Stock Exchange, the city where many of their key executives were physically based, they would have appeared only as small fishes relegated to the secondary markets. In Australia, however, they cut more imposing profiles.

Donaco, in particular, made an initial splash among Australian investors interested in the notion of winning high rewards from emerging markets, but neither firm has so far been able to translate their ambitious opening visions into businesses that worked.

Asia Gaming Brief is a news and intelligence service providing up to date market information for worldwide executives on relevant gaming issues in Asia.

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