Recovery, arrests and openings - 2016 in review

To coin a popular phrase, 2016 really has been a year of two halves in the Asian gaming industry. To continue with the cliches, it’s also fair to say there have been a few curved balls along the route.

The region limped into 2016, with Macau having reported a 34.3 percent drop in gross gaming revenue for the prior year and little prospect for any immediate turnaround. Legislation to allow casinos in both Japan and Vietnam seemed a distant dream, while the Philippines elected a hardline leader who, among his first actions, targeted the booming online industry and revoked the license of eGaming leader PhilWeb.

However, as the year wore on the environment improved. Macau returned to positive monthly revenue growth in August for the first time in 26 months. And the pace of growth has accelerated each month thereafter, helped by the introduction of Wynn Resorts’ Wynn Palace and Las Vegas Sands’ Parisian.

The Philippine market has surged, with casinos in Entertainment City recording a jump in revenue of about 20 percent in Q3, while resorts in other regional markets such as Cambodia, Vietnam and Saipan have also posted healthy growth rates, with most analysts predicting the trend will continue into next year.

It has not been all plain sailing. China’s arrest of 18 Crown Resorts employees in mainland China in October sent shockwaves across the region, raising significant question marks over marketing activities to Chinese citizens and also highlighting once again that Beijing’s anti-corruption drive has not gone away. In India, government action also took the industry by surprise by a November decision to ban two denominations of banknotes that made up more than 80 percent of cash in circulation. The move triggered a slump in gambling revenue there and had far reaching repercussions across the economy.

Still, the year looks set to end on a decidedly positive note for gambling in Asia. The government of Prime Minister Shinzo Abe in Japan picked up the baton of casino legislation and pushed through strong opposition at home to enact a bill that will pave the way to create what’s expected to be Asia’s second-biggest casino market. Likewise, a final year-end lurch in Vietnam looks set to produce legislation there that will also open the market, with significant opportunities for foreign investors. Developments in these two countries are likely to provide the main focus for 2017.

As 2016 winds to a close, we asked regional experts to provide us with their views on what had been the most noteworthy or surprising events for the year. Their comments follow (in alphabetical order).

Harmen Brenninkmeijer, managing partner at Dynamic Partners

2016 was an interesting year, Macau’s downturn was reversed by the casino operators focusing on the mass market and by the opening of the new properties, the Wynn and the Parisian, being the largest. However, as the positive attitude towards the Macau gaming market returned, the actions by the police in China related to the arrest of the Crown casino promoters also made everyone feel less secure about where the market is to be.

The election of Philippine President Duterte created great headlines as he stated he withdrew the license of Philweb, even though legally that license had expired. The bigger change is the fact that Pagcor is to be a regulator and will give up its operations supposedly by September 2017. That would be a massive step towards better governance. However, the process will not be straightforward even if conducted in a transparent manner. It’s challenging to get the right process conducted, whereby the properties are sold for the right price. Will it be one buyer, or will they be sold one by one?

The online developments in the Philippines are a boon for Cambodia as it seems to be the only proper alternative to the Philippines. This however, will not be as easy as the industry is underdeveloped, staffing will be harder and the challenges will be more numerous. But Cambodia’s potential losses of traffic at borders will be able to make up in this iGaming area.

David Green, CEO Newpage Consulting

1) Perhaps the most significant event of the year was the arrest of Crown’s employees in the PRC. While the reasons for their detention have not been made public, the implications of this action by China are far reaching. Does this indicate that the overtly China-facing nature of much of the casino/integrated resort development which has occurred across the globe in the past 15 years is underpinned by an erroneous assumption that it is an open market for such services? Will it adversely impact the appetite for investment in future market opportunities, such as are underway or anticipated in Japan, Korea, Vietnam, Australia and Cambodia? At a more micro level, if there has been a demonstrable governance failure by Crown which put its employees at risk, how might this play out in terms of regulatory responses?  This story has a long way to run, but it could well shape the future of the industry in ways not seen since the late 1980s, when the first of the large scale developments we now know as integrated resorts opened in Nevada.

This story has a long way to run, but it could well shape the future of the industry in ways not seen since the late 1980s, when the first of the large scale developments we now know as integrated resorts opened in Nevada.

2) The release of new draft gaming oversight laws in Cambodia and Vietnam during the year was a welcome development. Assuming the political and bureaucratic will exists to drive reform of the gaming industry in both countries, the payoff will be enhanced investment, a more cohesive set of social safeguards for local host communities, a larger and more consistent revenue stream for government, and a sustainable alternative to traditional industries which may be on the wane, particularly those which depend on the lowest possible labour cost structure to support them. While it remains to be seen how effective the announced measures are in delivering these outcomes, at least there has been policy advertence to the need to upgrade regulation in order to put value into casino licences, and to partly de-risk the regulatory and jurisdictional shortcomings of those markets.

3) The rise of Saipan as a gaming jurisdiction has amazed many. Assuming the figures announced by the operator in its results statements are correct, it raises the question why it is that a Commonwealth of the United States can host such a successful China-facing operation, without any apparent response from either the US or Chinese governments? Macau has been criticized for years by the Department of State and by the US-China Economic and Security Review Commission. There is a reasonable likelihood that money which may previously have been deployed by gamblers in Macau has now been displaced to Saipan, and other jurisdictions remote from direct PRC control or oversight. Perhaps it is time for the application of the analytical framework used to lampoon Macau to be adapted for use in Saipan?

Global Market Advisors: Andrew Klebanow

2016 finally saw an end to the decline in GGR and the market is now beginning what appears to be a steady recovery. Some of that recovery can be attributed to the openings of Wynn Palace and The Parisian. Another factor is the collective success of the major operators in reducing their reliance on the junket segment and improving their marketing efforts towards premium mass players. Having said that, the central government continues to find ways to temper Macau’s recovery. The recent reduction in the maximum amount permitted in ATM withdrawals is but one example.

Should central policy makers step back and allow Macau to continue to recover, there could be a sharp increase in GGR. One only need look back to 2010 and then to 2013 to appreciate how quickly this market can rapidly grow from what previously appeared to be a very desperate time.

Shaun McCamley

I'm happy to see that the Vietnam government has finally moved forward and looks likely to implement a trial period allowing Vietnamese nationals into selected casinos within its borders. However, the two locations selected, Van Don and Phu Quoc will, from an operational and revenue creation viewpoint, face significant challenges and will not have any real impact on this trial.

Sudhir Kale, founder and CEO of GamePlan Consultants

What has happened in Macau since June 2014 has been nothing short of tumultuous. After gaming revenues tripled from US$15 billion in 2009 to US$45 billion in 2013, most gaming operators and analysts could be forgiven for believing that the phenomenal revenue growth they were witnessing was but the tip of the iceberg. 2014 showed us that Macau wasn’t an endless growth engine for gaming operators. Gaming revenue began to slide in June 2014 (year-on-year), and the downward spiral continued all the way to July 2016! In August 2016, GGR went up by 1.1 percent. Revenue growth, year-on-year continued with 7.4 percent increase in September, 8.8 percent in October, and 14.4 percent in November 2016. Heads of gaming companies with presence in Macau are already painting a rosy picture for the future of Macau, sometimes supported in their optimism by the province’s government officials. “Ding-dong, the bad days in Macau are past…”

However, a lot has changed from the Macau of 2013 to the present day. First, the credit financing that was so easily available to junket operators, has all but evaporated. The government crackdown on corruption continues, and Mainland China has become increasingly vigilant about stemming the flow of Chinese money, ill-gotten or otherwise, out of the country. The VIP market will never return to pre-2014 levels, and retaining a stable of “good” loyal customers on the main gaming floor has become increasingly difficult, thanks to added gaming capacity and augmented lodging options over the past 12 months.

The VIP market will never return to pre-2014 levels, and retaining a stable of “good” loyal customers on the main gaming floor has become increasingly difficult, thanks to added gaming capacity and augmented lodging options over the past 12 months.

Progressively, more and more visitors to Macau are not first-timers but repeat customers (notwithstanding the often cited “fact” that only 1.5 percent of potential visitors from China have actually visited Macau). In choosing a gambling venue, these customers look beyond dancing fountains and replica towers. Sadly, compared to other casino jurisdictions in the world, what Macau offers its customers on the main gaming floor by way of incentives can only be characterized as miniscule. Main gaming customers are often treated like cattle, be it at the bus bays at Macau’s entry points or at the entrances of the self-proclaimed iconic casinos.

What we are dealing with in present-day Macau is essentially a larger proportion of repeat visitors, most of whom have already formed their opinions about where they can get the best (or least worst) customer experience and where they will most likely find that elusive luck. This breed of customers is indeed different from the visitors in 2009 who were mesmerized by the greenery, the opulence, and the razzmatazz of casino properties owned by the six large operators. Casino operators will have to adapt to this change in client composition, and adapt fast if they want to hold on to their market share amidst a market that has probably past its prime, at least in the short-medium term.

Ben Lee, managing partner IGamiX Management & Consulting

2016 was a tumultuous year for the gaming industry in Macau. We saw a steady stream of negative YoY comparisons in terms of gaming revenue finally turned positive towards the end of Q3/beginning of Q4 with the opening of two new properties.

Contrary to some speculation that the turnaround was all due to the mass, our analyses showed that the real driver for the ‘recovery’ was the VIP segment. Mass reached a peak of 50.2 percent market share in July before dropping back to 46.6 percent in October.

Contrary to some speculation that the turnaround was all due to the mass, our analyses showed that the real driver for the ‘recovery’ was the VIP segment. 

From discussions with our contacts, it appears that a marked improvement in the liquidity position of the top junkets was the catalyst for the resurgence. The new properties provided the justification and the drawcard, and the offers of new lines of credit provided the means for legacy players to return to Macau.

We at IGamiX expect the same ADR range to hold for the last remaining month of the year ie between MOP550-650 million which should in turn see the month finish with a slight positive.

Jay Sayta, founder GLaws.com

2016 was an eventful year, not just for the gaming industry but for most of the economy. One date however is certain to go down in history books this year and that is 8th November, 2016. It was on that fateful day that Prime Minister Narendra Modi announced that 500 and 1000 rupee currency notes (that constituted around 85 percent of the total currency in circulation), will cease to be legal tender from the succeeding day (with some exemptions).

Casinos in Goa, Sikkim and Nepal have been deeply impacted by the demonetization move, with business falling by 80 percent or more. The stock prices of Delta Corp, the only listed casino company have fallen by around 45%. Illegal gambling, betting and matka businesses, rampant in India have almost been eradicated.

It is however believed that the slowdown for the legal casino and gaming business will only be temporary in nature, while there will be permanent damage to the illegal betting and gambling syndicates, which operate on the basis of black money.

2016 was also the year that leading real-money online poker website Adda52 was acquired by Delta Corp for an estimated deal value of US$25-28 million. Some other major groups including Essel Group have forayed into the online casual games or skill games business. Delta Corp is also reportedly in talks to acquire Ace2three, a leading real-money online rummy website.

Among other developments, this year also saw the launch of a new online gaming and betting arena in Sikkim, resulting in the first legal sports betting operations in the country by Golden Gaming. The government of Goa hiked entry fees and license fees for onshore and offshore casinos, while reviving one more offshore casino license. The Sikkim government also hiked entry fees to casinos and barred entry of local residents in state casinos.

The government of Goa hiked entry fees and license fees for onshore and offshore casinos, while reviving one more offshore casino license. The Sikkim government also hiked entry fees to casinos and barred entry of local residents in state casinos.

In the meanwhile, the state of Nagaland became the first state to recognise and regulate online games of skill like poker, rummy and fantasy sports and have started issuing Letter of Intents (LOIs) to applicants. The process of issuing final licenses to online skill game companies is expected to take a few more months.   

The union territory of Puducherry and states like Andhra Pradesh, Telangana, Karnataka etc. also held discussions on allowing casinos to bolster tourism and bring revenues to the state exchequer. The All India Gaming Federation (AIGF), a not-for-profit industry body formed by leading gaming and lottery companies was formed for tackling issues relating to problem gaming and urging state government to lobby and liaise with governments to legalize gaming and betting.

Sam Sheng, director Double Square Consulting

I think the biggest and quietest change in 2016 is the continuous evolution of patrons’ demand patterns. In the past, casino operators publicly promoted non-gaming amenities, but the focus has always been predominantly on gaming, and without much concerns about leisure yield. Considering the high amount of investment required to build and operate casino resorts, it will unlikely be sustainable if the operators only heavily rely on gaming revenue, whether VIP or premium MASS,  to generate satisfactory level of return on investment. In other words, it will become more and more difficult to make money, since now the operators have to look after all aspects of all their assets instead of just gaming.

I think the shifted business strategy, for at least the Macau market, would be what I call ‘total yield’, meaning the operators have to develop a business strategy of which analytical, operational and financial attention have to be paid to all assets beyond gaming table and machines.

Tim Shepherd, co-founder and president of business development at Silver Heritage Group

I said this time last year that a major player would move into SE Asia and Macau Legend proved me right as they secured the gem that is Savan Vegas (now Savan Legend). I understand results are very promising and they haven’t even started building it out to their normal luxurious levels. In 2017 I think we will continue to see the larger players in Macau flex their muscles internationally looking for ROIC no longer available in Macau.   

I said this time last year that a major player would move into SE Asia and Macau Legend proved me right as they secured the gem that is Savan Vegas (now Savan Legend). 

Seeking similar growth are the larger junket groups who will continue to diversify into bricks and mortar across Asia Pacific – they are saying “why give 50 percent of the profits to the licensee/builder?” They are going to back themselves to run a casino as well as anyone by recruiting the right managerial talent (much of it streaming out of Macau because of blue card issues) and already they have the player base. They also have a growing understanding of AML issues.  

Augustine Ha Ton Vinh, president and CEO of Stellar Management

Vietnam, after years of wringing its hands whether to open up the gaming industry, has finally reached important decisions and allowed international investors to come into one of the last fertile gaming lands in Asia.

Twenty years after the opening of the country’s first gaming lounge, in 1994, in Do Son, a seaside resort in the North, Vietnam today has more than 40 electronic gaming lounges in five-star hotels around the country and 7 small casinos with live dealers, most of them at the Vietnam-China borders. In the past few years, four integrated resorts have been granted investment certificates and the first gaming license has been issued to the Grand Ho Tram resort in South Vietnam. As soon as the other three IR’s (Van Don in the North, South Hoi An in the Central, and Phu Quoc in the South) reach the required $1 billion disbursement in investment, they will also get their gaming licenses.

The past few months have seen important decisions by the ruling Communist Party. Vietnamese locals, above 21 years of age, paying an entrance fee, will be allowed to enter two integrated resorts in Van Don and Phu Quoc on a 3-year trial basis. The construction of infrastructure projects, including airports, highways leading to the IR’s, hotel and gaming facilities, are being fast-forwarded.

The Prime Minister is expected to approve the new gaming decree this Christmas or early in the year and the Ministry of Finance will soon make the document public.

In early December 2016, the PM and his Cabinet approved another IR in the well-known Cam Ranh Bay in central Vietnam. The ancient capital of Hue, also in Central Vietnam, is on the radar screen for another IR.

Michael Zhu, Innovation Group

We think China will remain a key feeder market for many gaming jurisdictions, but the focus is gradually switching from VIP to mass-oriented, and patrons are increasingly seeking unique experiences worldwide, including new frontier markets.

According to research by China Outbound Tourism Research Institute (COTRI), more than 100 million mainland Chinese travelers made outbound trips in the first nine months of 2016, which continuously fuels a tremendous flow of customers and spend potential to tourist destinations including many gaming jurisdictions, especially in the form of premium mass and grind mass guests. Additionally, more than half of total trips (51.7 million trips) were made outside of Greater China (including Hong Kong, Macau and Taiwan) while less than half (49.8 million) were made within, presenting further opportunities to locations worldwide.