Risk premium clouds prospects

“I hate gambling. I do not want it. “There will be no casinos outside of what are existing. I am not granting anything.”  

Since the beginning of his presidency just over two years ago, Philippine President Rodrigo Duterte has not minced words when talking about his disdain for gambling. It was only a couple of months ago, he lashed out at the casino sector anew with those stark words.

“Online gambling must stop,” were Duterte’s words during his very first cabinet meeting on June 30, 2016 as he vowed to destroy illegal online gambling and electronic gaming parlors that had previously been loosely regulated. Putting action to words, on February 2, 2017 he passed an executive order directing law enforcement agencies to step up the fight against illegal gambling.

In January, Duterte ordered state-owned casino regulator, the Philippine Amusement and Gaming Corp. (PAGCOR)  to stop accepting new casino applications to prevent overcrowding in the sector.

But that has not stopped confusion between the President’s office and PAGCOR and the two bodies have made conflicting statements about the status of casino projects in the country, creating an uncertain investment environment in the gaming sector.

“It certainly derails from the country's pursuit to be a leading Asia gaming destination. It also creates a lot of uncertainty for operators in terms of how to measure the potential of the market given the conflicting regulatory environment,” said Margaret Huang, a Bloomberg Intelligence Asia gaming analyst.

In late March, Duterte announced that he would not allow any casinos to open on Boracay, and that the island would be closed to tourism for six months for an environmental cleanup. The pronouncement came only a few days after PAGCOR issued a provisional license to Macau-based Galaxy Entertainment and its local partner Leisure and Resorts World.

Later, Galaxy Vice Chairman Francis Lui Yiu Tung said his company's dispute with the government over its plans to develop a gambling resort on Boracay was just a "misunderstanding." Duterte had in fact held a meeting with Lui Che-woo, chairman of Galaxy on December 6, 2017 in the Palace, where according to PAGCOR Chair, Andrea Domingo, the proposed casino-resort was discussed and agreed upon.

But when asked, Duterte appeared to not know about Galaxy Entertainment's plan, saying "What? Mga casino? Who owns the casino? There are no plans there for casinos. There are too many.”

Although Galaxy officials have expressed optimism about their chances of proceeding with casino projects in both the Philippines and Japan, they have said that Macau will remain their priority for now.

Then in August, Duterte abruptly shelved Landing International’s $1.5 billion integrated casino project in Manila and fired Nayong Pilipino Foundation Inc., which leased around 10 hectares to Landing just as it was breaking ground on the new project at an elaborate launch ceremony. Duterte ordered a review of Landing’s lease contract calling it “flawed,” and the 75-year lease period a “ridiculous long period of time.”

After much confusion, Justice Secretary Menardo Guevarra said the deal between state-owned Nayong Pilipino and Landing would be investigated, but stressed that it did not mean the project was dead.

“The removal of all the members of the Nayong Pilipino board, by itself alone, does not affect the implementation of the project,” he said following the event.

A report by independent financial adviser FTI Consulting Philippines, Inc. states that “despite the (gaming) industry’s positive outlook, it is not without risks brought about by the current regulatory environment.” The report goes on to state that the current administration’s policies on casinos and gaming were “quite unpredictable,”

This confusion and uncertainty comes at a time when the Philippine gaming sector is poised to become one of the fastest growing in Asia, partly benefiting from bans on gambling in many Southeast Asia nations such as China.

“Investors are optimistic about the growth in Manila and rising gaming revenue, particularly in Entertainment City. This is fueling positive sentiment for the up and coming market particularly as we see the growth of domestic demand and possible international demand,” said Huang.

According to government data, at the end of last year, there were nine private casino firms in the Philippines operating 1,444 gaming tables and 9,427 electronic gaming machines. The country boasts one of Asia’s fastest-growing gambling markets, with gross gaming revenues rising 11.6 percent to 176.5 billion pesos last year.

“Policy uncertainty has always hounded the gaming segment, from tax implications, to money laundering, and now to expansion plans of other casinos. The more important question is if the growth of the market will be strong enough for more players to enter the market. With the risk of VIP growth slowing down because of uncertainty in China's economy, this brings into question if the market can handle more supply in the near future,” said Richard Laneda, a research analyst at Col Financial.

“Sentiment was ok up until this year when the China economy was put at risk because of the trade dispute with US. We saw VIP volume growth in Macau slow down in 2H18 and this affects the outlook not only in Macau but also in the Philippines,” he added.

While VIP growth might be at risk, there is still movement in the online gaming sector.

The recently set up Philippine Online Gambling Operations (POGOs) licenses have generated some economic development, particularly in the property and F&B sectors.

Gambling is illegal in China and to skirt this obstacle, gambling companies have to operate outside the mainland- mainly the Philippines.

According to the PAGCOR, 57 POGOs have been authorized to operate in the Philippines. While it’s unclear how many Chinese are employed under these POGO licenses, anecdotal evidence shows that the majority are Chinese-owned, helped by Duterte’s improved ties with Beijing.

PAGCOR predicts the licenses will generate P6 billion in fees in 2018. The gambling regulator gets 2 percent of the gross gaming revenues of POGOs,which are then used for PAGCOR's programs.

“I think they are here to stay as they are an important source of funds for the government. But additional demand has slowed this year and could slow further next year as PAGCOR is no longer giving out new licenses,” said Laneda.

Despite the uncertain political environment, some plans are moving ahead. Japan’s Universal Entertainment Corp announced it will take its local unit public through a backdoor listing in Manila.

Asiabest Group International, an investment holding company listed on the Philippine Stock Exchange, said its shareholders signed a deal for Universal’s subsidiary, Tiger Resort Asia Ltd, which owns operates the $2.4 billion Okada Manila integrated casino-resort, to acquire two-thirds of the company for $12 million.

PAGCOR has said it will look into the transaction.

“Any application by our licensee to undergo public listing will require approval of PAGCOR but we have not received any application yet from Tiger,” said Domingo.

While the President has made clear his distaste for gambling, it’s also clear that the gambling industry is very lucrative for the country.