Gaming volumes at Russian Far East casino investor Summit Ascent Holdings Ltd compare well to the pioneering years of Macau casino market liberalisation, says brokerage Daiwa Securities Group Inc.
It added that – similar to the early days of liberalisation in Macau – Summit Ascent’s single Russian casino property, Tigre de Cristal (pictured), in the Primorye Integrated Entertainment Zone near the Russian Pacific port of Vladivostok, is serving an undersupplied Chinese market – this time north China, rather than the south of the country.
The brokerage announced on Monday – via a 40-page report – coverage of Hong Kong-listed Summit Ascent, a firm controlled by Asian casino investor Lawrence Ho Yau Lung.
“The… level of ROIC [return on invested capital] we expect Summit Ascent to generate is typical of pioneering gaming projects in frontier markets,” wrote analysts Jamie Soo and Adrian Chan.
They added that Tigre de Cristal – which officially opened in November 2015 – had “reached Sands Macao’s first full-year average monthly gaming volumes in its first 10 months of operation”.
“Initial capex [capital expenditure] for Summit Ascent’s phase one project was US$172 million. We estimate Tigre de Cristal would generate property EBITDA [earnings before interest, taxation, depreciation and amortisation] of HKD160 million [US$20.6 million] and HKD350 million in its first and second full years of operation, respectively, representing a first-year ROIC of 11 percent and second-year ROIC of 25 percent,” stated Mr Soo and Mr Chan.
Sands Macao, promoted by a unit of U.S.-based Las Vegas Sands Corp, cost US$265 million and opened in 2004. The property is feted in industry circles for having achieved 100 percent return on invested capital before the end of its first year of operation.
Daiwa stated: “We project the Vladivostok market’s gross gaming revenue (GGR) to reach US$150 million in 2017 and potentially US$1.3 billion by 2020 (estimate).”
The brokerage said: “[Neighbouring] northern China accounted for 21 percent of China’s high net worth individual population in 2014 but only 6 percent of Chinese visitations to Macau in 2014.”
The report added: “We believe there remains a large amount of untapped gaming demand in cities within a three-hour flight time of the Primorye Integrated Entertainment Zone.”
Daiwa further stated that Tigre de Cristal offered better margins on gaming than its larger and flashier cousins in Macau.
“Unlike Macau, where gaming revenue is taxed at 40 percent off the top-line GGR, Russia charges a fixed per-gaming table and per-slot monthly levy that is effectively approximately 0.5 percent of VIP GGR and approximately 4 percent of mass GGR (based on current revenue and existing table distribution between VIP and mass),” stated the analysts.
Brokerage Union Gaming Securities Asia Ltd said in a January note that a reported planned amendment to Russian gaming law could potentially double the levies on machines and tables payable by Tigre de Cristal and other casinos in the Russian market.
Daiwa said in its Monday report that operational costs at Tigre de Cristal were likely to be much lower than in Macau. It cited annual salaries in Vladivostok of US$12,000 to US$13,000, compared to the equivalent of US$30,000 annually for casino dealers in Macau.
“We believe a favourable tax environment (among the lowest rates globally) and low operating costs (particularly for labour) will allow Summit Ascent to offer attractive player incentive schemes while maintaining a 68 percent blended property EBITDA margin in 2021 (estimate), when we believe… [Tigre de Cristal] will be ramped up,” wrote Mr Soo and Mr Chan.
They noted that Summit Ascent’s chairman Mr Ho also served as chairman and chief executive of Macau operator Melco Crown Entertainment Ltd and Hong Kong-listed casino investor Melco International Development Ltd, which Daiwa said had “a 10-year track record of running a gaming business in Macau and elsewhere”.
They added: “We believe Summit Ascent will be able to leverage Melco’s strong junket and customer relationships to quickly establish key relationships and scale its VIP business accordingly.”
Daiwa said that plans by other investors to build casino resorts in the Primorye Integrated Entertainment Zone could eventually create a “cluster” effect that would serve to draw in fresh customers to the zone.
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"VIP growth [in Macau] is roaring back on the heels of last year’s economic stimulus – but we think this could stall once the effect of the stimulus and the Chinese housing bubble wears off – as it did in 2013-14"
Cameron McKnight and Robert Shore
Analysts at Wells Fargo Securities