GGRAsia – Asia can ‘comfortably’ absorb new casinos: CLSA

Asia can ‘comfortably’ absorb new casinos: CLSA

Sep 16, 2015 Newsdesk Japan, Latest News, Macau, Rest of Asia, Top of the deck

The number of casinos in Asia is expected to increase by 30 to 230 over the next five years and the region “can comfortably absorb this capacity increase,” brokerage CLSA Ltd said in a report published on Monday. Most of the new casinos “will use the large-scale integrated resort model, which dwarfs many of the small existing operations in the region,” stated the report.

CLSA interviewed senior management at leading global gaming companies, as well as architects and a regulatory expert to produce the 200-page report.

“We ask whether Asia has too many casinos; and we’re pleased that their views are consistent with our findings that Asia remains an undersupplied gaming region,” said CLSA analysts Aaron Fischer, Marcus Liu and Jon Oh.

Casino gaming is already fully legalised in several countries in Asia, including Macau, Australia, Malaysia, Singapore and the Philippines. Restrictions on local gambling however “have constrained growth in [South] Korea, Cambodia and most recently Vietnam,” the brokerage said.

These Asian markets combined generated gross gaming revenue (GGR) of approximately US$60 billion in 2014, according to CLSA estimates. Macau accounted for about US$44 billion of GGR last year, down 2.6 percent year-on-year, show official data.

Despite the slowdown experienced in Macau’s gaming industry, Asia remains attractive “because of its large and growing middle class and the… high propensity to gamble” exhibited by its population, said CLSA. “Asian countries also tend to limit gaming licences to just a few operators who are willing to build massive integrated resorts,” it added.

CLSA expects an 81 percent increase in capital expenditure (capex) invested in the Asian gaming industry between 2015 and 2020, from US$50 billion to US$90 billion.

“We expect a smaller increase in table count, moving up 74 percent from 9,632 to 16,749,” said the research team, adding that the increase would result in total Asian GGR growing to approximately “US$73 billion”.

“With an increased focus on the mass market, especially in Macau, we expect Asian gaming-industry EBITDA [earnings before interest, taxation, depreciation and amortisation] to double from US$9.5 billion to US$18.7 billion,” said Mr Fischer and his colleagues.

New projects

According to CLSA’s report, there are 17 committed projects set to open before 2020. The first on that list is Studio City in Macau – majority-owned by Melco Crown Entertainment Ltd – due to open on October 27. Another two casino licences are likely to be awarded in South Korea later this year, with several gaming operators eyeing that market’s opportunities.

CLSA lists what it describes as criteria for judging the attractiveness of new gaming jurisdictions, including: “Ease of access for non-local gamblers; [a] large local gaming market; [the] ability to attract ‘high value’ players; laws conducive to foreign investment; [a] regulatory regime [that] stimulates reasonable investment level; moderate competition in [the] local market; and capex and opex [operational expenditure] levels set to deliver acceptable ROIC [return on invested capital].”

The brokerage’s research team said Macau “will add the most capex over the coming years in Asia, with six standalone properties coming on stream in the next two years”.

They added: “We expect average ROIC to substantially drop from 34 percent on existing properties to around 21 percent for new properties in Macau. However, that 21 percent comfortably exceeds the average cost of capital as well as the global average ROIC for major projects in the U.S. and Australia.”

CLSA remains bullish on Japan, describing it as “the most lucrative market that has not awarded [casino] licences”.

“Given the crowded legislative agenda, we think it unlikely but not impossible that the IR Promotion bill will be passed during an extraordinary Diet session during the late autumn of this year,” said the report.

Casino legalisation in Japan will be a two-statute process. After an enabling bill – described as the IR Promotion bill – legalising casino resorts at the conceptual level, a second piece of legislation – referred to as the IR Implementation Law – is expected to detail the specifics, including the number of casino licences, locations, tax rates and whether locals would be allowed to gamble in them.

CLSA added: “If not passed within the calendar year, the bill will probably have to wait until an extraordinary session in autumn 2016, as Upper House elections in mid-year will complicate any political push for casino legislation in early 2016. As per our Japan casino timeline, we do not expect door opening until 2023 if the IR Implementation Law is passed in spring 2017.”

Capex risks

David Green, chairman of Newpage Consulting Ltd and an advisor to Macau’s gaming regulator, was one of the interviewees for CLSA’s report.

Mr Green stated that governments “should not be induced to host IRs without a compelling set of social safeguards”. However, he added, it is “unwise for governments to interpose themselves in commercial decisions”.

Several governments in Asia, notably South Korea and Vietnam, have stipulated a minimum capital investment for casino resort projects.

“Specifying minimum capex for new IR developments is ill-advised,” said Mr Green.

He explained: “Too high and either the offering will fail to attract interest or will fail to generate the income required to support that level of expenditure. If the bar is set too low, a host jurisdiction risks getting less than it might reasonably have bargained for had it left the investment decision to market forces.”

Mr Green additionally said that tax rates applicable to the gaming industry have become complicated “due to the prevalence of taxation of gross gaming revenue and corporate income tax being applied together.

“The challenge for governments is to accept that the promise of sustainable returns is fundamental to any decision of developers to invest in an IR. Tax arrangements should offer that promise for successful operators, and should be fixed for an extended period of time, rather than changed to yield greater returns for the host government,” he suggested.

The Macau government is currently carrying out what it refers to as a mid-term review of the city’s gaming industry, which could be the base for negotiation on the specific terms of gaming licence renewals. The current gaming concessions expire on varying dates between 2020 and 2022.

Commenting on the mid-term review, Ambrose So Shu Fai, chief executive of Macau casino operator SJM Holdings Ltd, said he expects tax rates in Macau to be “stable throughout the life of the concessions”.

Mr So, also interviewed for CLSA’s report, added that he expects the Macau government’s review to bring “greater clarity about certain issues such as smoking regulations, transit visas and labour policy”. “Table quotas will likely take longer to determine,” he added, referring to the Macau government’s cap on the number of live dealer gaming tables allowed in the local market.