Navigating Indochina’s investment risk

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. Suncity 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 left 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.