Chinese investors: Beacon of hope for Russia’s ‘Vegas’?

Two companies backed by Macau’s Lawrence Ho have entered into an agreement to develop a casino in Russia’s Far East that hopes to attract gamblers from northern China, but analysts say big questions remain about the project’s viability

 

 

According to Hong Kong stock exchange filings, Summit Ascent Holdings Ltd will acquire a 46% stake in a Russian company that holds a 50% share in a venture with a gaming license and leases on two lots of land in the Primorye Integrated Entertainment Zone, an area near Vladivostok that has been earmarked for casino development. 

Melco International Development, the Macau casino operator controlled by Ho, plans to acquire a 5% stake in the Russian company, which is called

Oriental Regent. Ho has also been appointed chairman of Summit and owns 37% of the company. 

Since 2007, gambling has been banned across Russia except in four specific zones: Azov (Krasnodar), Yantarnaya (Kaliningrad), Siberian Coin (Altai) and Primorye (Far East). Industry analysts regard Primorye as the most promising location, with about 400 million people living within one hour’s flight from Vladivostok.  

With its proximity to South Korea, Japan and China, the Primorye gambling zone seeks to capture gamblers from this rapidly growing market and position itself in the region as a new “Pacific Vegas”. A US-based research firm, Gaming Market Advisors, has estimated that a total of USD 5.2 billion (RUB 151.8 billion) gaming revenue will be generated from this casino zone by 2022.

The Russian government is also offering a low tax rate – 3% to 7%  - to attract investors. The rate is much lower than 39% in Macau and 22% in Singapore.

“Vladivostok will be far more appealing to gaming companies seeking a low gaming tax environment.  It will allow them to shift VIP players from high tax environments to the IEZ,” Andrew Klebanow, the principal of Gaming Market Advisors, said.

However, despite the market potential and low-tax benefits, the Primorye casino zone had struggled to attract international investment until this week’s announcements.

Although shares in Melco and Summit rose sharply after details of the deal were made public, many industry observers and investors remain hesitant about the potential of the  Russian gambling market.  

Corruption concerns could be a major factor in the low level of investor confidence. Transparency International assessed 176 countries on how corrupt their public sector is perceived to be in 2012 and Russia ranked 133. Given the complex nature of the casino business and its vulnerability to underworld society, a transparent regulatory legal framework and a reliable security framework remain crucial in ensuring investor confidence.

A second factor is the region’s relatively weak transport infrastructure, complicated visa requirements for tourists and local amenities, which pale when compared with regional competitors such as Macau and Singapore.

There is also scepticism about the capability of the regional government and local business partners to realize their ambitions.  Vladivostok, the host city of the APEC Summit 2012 in the Primorye region, does not have a good track record in terms of infrastructure projects: It has spent USD 2 billion on a bridge that connects the city to an island with a population of just 5,000, according to local media.  Construction of two hotels was also delayed in what became one of the most expensive state projects in Russia.

What’s more, the only confirmed casino project in Primorye has run into difficulties. The First Gambling Company of the East had planned to launch Primorye’s first casino in first quarter of 2013 but the company announced a delay in the project in January. Igor Akulich, the company’s general director told the Primorskaya Gazeta, a local newspaper: “It is the first attempt to build a gambling complex in Russia that was specifically designed for this purpose and we hope to launch it in the third quarter of this year.”

Mark Zavadskiy, the chief executive of Hong Kong-based research company Asia To Go, says most local players are pessimistic about the zone’s prospects. 

“They all see this is as a project led by the previous administration of Sergei Darkin with little or no backing from actual private investors,” he said referring to the former governor, who was removed from his post 18 months ago. 

However, the announcement of Ho’s planned investment in the Primorye casino zone may revive the project’s momentum. According to the announcement, the plan is to develop a casino resort complex on the principal land lot (approximately 90,245m2) with 119 hotel rooms, 800 slot machines, 25 VIP gaming tables and 40 mass market gaming tables. Construction of the superstructure of the main casino and hotel building is already completed.

According to a number of sources, the Russian regional government is now in discussion with another Asian gaming company about an investment. 

The zone’s official website lists Global Gaming Asset Management, NagaCorp Ltd., Diamond Fortune Holdings Ltd. and Royal Time as potential investors.

David Ellis of NagaCorp said that the company had made a non-binding proposal and was shortlisted for a “right to negotiate” with three other companies. “Since that date we have been conducting negotiations with the government, however to date no commitment has been reached and discussions are ongoing,” he told the Asia Gambling Brief.  A representative of Global Gaming Asset Management refused to provide an update but said they are “currently in negotiations regarding this proposed project”.

Diamond Fortune did not respond to a request for comment.

Russian government officials are exploring other sources of investment from mainland China. Last month Vladimir Miklushevskiy, the governor of the Primorsky Territory met with Hu Bing, president of the Russia-China Investment Fund (RCIF), a private equity fund established by the Russian Direct Investment Fund and China Investment Corporation. The discussion is still preliminary and yet to reach any agreement.

Analysts say Chinese investors are a sensible target for Primorye’s gambling zone. They appear familiar with the investment environment in Russia. For example, China Investment Fund acquired a 45% stake in Nobel Oil Group for US$ 300 million in 2009 and bought a US$100 million stake in Russian bank VTB Group in 2011.

Klebanow of Gaming Market Advisors says that US-based gaming companies are unlikely to be interested in investing in the zone because they face a greater regulatory burden from their home jurisdiction. 

“Asian based gaming companies have greater freedom and flexibility when deciding whether to enter new markets,” he said.

Melco’s interest in the region centres on the links between Primorye and northeast China. The casino project “has the advantage of being geographically close to the target feeder markets, i.e. the three Chinese provinces in Northeastern China, namely, Heilongjiang, Jilin and Liaoning,” the company said in the statement to the Hong Kong stock exchange. 

But it might be too early to celebrate the first foreign investor in the zone. The deal is still conditional and subject to “fulfilment of a number of conditions including legal, accounting and construction due diligence as well as the entry into a definitive investment agreement with the counterparty on or before 15 August 2013.”