Scientific Game

Rough Around the Edges

Ready or not, Donaco International’s purchase of Star Vegas Casino in Poipet puts Cambodia’s border casinos in the spotlight

Monday, 15 June 2015 20:19
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You won’t see hitching posts, tumbleweeds or swinging door saloons, but Poipet in Cambodia is the frontier. This casino strip lies just past Thailand’s busy border checkpoint at Aranya Prathet, where some 5,000 people cross into Cambodia daily. After passing an arch crowned in the style of Buddhist stupas, travelers must walk some 200 meters through the heart of the strip to reach Cambodia’s immigration post and receive their visas.

The largest of Cambodia’s 14 border casino areas—six on the Thai side and eight on the Vietnam side—Poipet serves as a gateway from Thailand for trade and travelers to the ancient Angkor Wat complex. Poipet’s first casino, Holiday Palace, opened in 1998 with 12 tables. Today, Poipet has ten casinos with about 750 tables, 3,900 gaming machines and around 2,500 hotel rooms along an inverted L-shaped strip with that welcoming arch at its corner. Poipet casino customers are almost all Thais, who don’t need visas to enjoy legal casino gaming not available at home.Though it can seem makeshift and disorganized, Poipet had estimated gross gaming revenue in the $400-$450 million range last year, with EBITDA around $150 million. The top property, Star Vegas Resort and Club, is being sold for $360 million to Australialisted Donaco International, a transaction likely to augment a recent revival in Poipet. “The deal will improve the overall market as the new ownership will be driven to increase their performance, also resulting in spillover customers for the other properties,” observes Ray Poh, COO of Singapore-based slot manufacturer Weike Gaming.

Poipet enjoyed a heyday in the early 2000s that receded as Macau, Phnom Penh’s NagaWorld and Singapore became attractive gaming alternatives for Bangkok residents. “Poipet is a two-star experience that requires three to four hours in a car,” Global Market Advisors Partner Andrew Klebanow says. “Macau is a five-star experience that’s a two-and-a-half hour plane ride away.”

But Mr Poh believes Poipet has enduring appeal for Thais even after they’ve seen the bright lights of Cotai and Marina Bay. “Poipet serves as a convenient point for gaming,” he says. “Casinos in Poipet accept Thai baht, which also serves as a plus point over other casinos in the region.”


Thailand’s military government, installed last May after years of political bickering, has cracked down on Bangkok’s underground casinos, Poipet’s main competition for players that don’t want to fly. Thailand’s economic growth, though dampened by political strife, keeps producing additional gaming demand for Poipet. Golden Crown, which has three casinos and four hotels, is building two hotel additions, including a 15-storey tower that would be the tallest in Poipet.

Poipet is also finding new revenue from online gaming run by casinos or third parties. Streamed videos of young women placidly dealing cards under bright lights on Poipet’s gaming floors feed the live dealer betting functionality on online gaming sites around the world. Casinos also rent office space to online gaming enterprises. Golden Crown’s new walkway linking its properties includes space for online gaming webcasts, back offices and call centers.

But the main business of Poipet is conducted face to face. Minimums bets are as low as B40 ($1.25) with VIP maximums up to B800,000. As across Asia, baccarat dominates. Poipet’s casinos employ about 10,000 people, most of them Cambodians, also known as Khmers, in part to prevent dealers colluding with the Thai players. Casinos have instituted a minimum wage of B5,000, nearly 20% above Cambodia’s national standard.

Some casinos look like church basements hosting a “Las Vegas Night” under harsh fluorescent lighting with players seated on dinette chairs. Others resemble gaming halls in Nevada border towns such as Jean or Mesquite or smaller satellite casinos in Macau, with comparable revenue. The 71-table main gaming hall at Grand Diamond Casino, opened in 2002, rakes in “about a million baht on a good day,” according to Manat Bumrerjit, who calls himself the “representative” of the owner, a Thai former politician. “Casinos don’t live with VIP, they live with the main hall.”

Grand Diamond is linked via skybridge—adorned with a video board flashing promotional messages at incoming travelers—to sister property Poipet Resort, with the longest and most attractive frontage on the Cambodia immigration leg of the casino strip. The two properties have combined estimated annual gross gaming revenue of $100 million from 235 tables, including the only craps table in Poipet, and 1,000 machines on revenue share arrangements with two different companies.


Mr Bumrerjit, who’s been in Poipet since Grand Diamond opened, says safety is a top priority. “People come here to be confident, feel safe,” he says, an oblique reference to Bangkok’s illegal dens. Poipet casinos also try to set themselves apart by bringing in recognized Thai entertainers for holidays shows, though Mr Bumrerjit laments Poipet’s lack of family attractions.

The two properties run 20 buses daily from Thailand, the majority from Bangkok and a couple from the resort town of Pattaya, that bring around 600 visitors, upwards of 700 on weekends. Other operators provide similar services. Most buses leave in the early morning and depart from the Thai side of the border around 8pm, with a few buses departing Bangkok late afternoons and leaving Poipet around 8am. The border closes at 10pm and reopens at 6am.

Grand Diamond and Poipet Resort have a total of 600 rooms that go for B1,500 a night, and are free to players that spend B30,000, about five times the average of bus customers. VIPs that deposit B300,000 (around $10,000) get complimentary pick up, room and meals. Junket promoters are all from Thailand, and rolling commissions can reach 2%.

Holiday Palace Slots Manager Halim Lim says that property gets 30-50 VIPs a week from Bangkok, but the revenue split is “random” depending on who shows up and how they play. VIP players deposit a minimum of B1,000,000 for a 1.8% commission. Holiday Palace has 41 mass tables, all but eight for baccarat, on its attractive main floor and 23 VIP tables. Holiday Palace and sister property Holiday Poipet, sharing a prime location closest to the Thai border gate, have estimated annual gaming revenue of $80 million combined.

Mr Lim says Holiday Palace’s slot floor offers the widest variety in town with 700 machines from about 10 different manufacturers. The average daily win per unit is around $200, while taxes are $50 per machine per month, Mr Lim says. The casino has a mix of revenue share deals and outright ownership of machines. It does slot VIP business with players checking in B300,000 per visit. Holiday Palace has 350 rooms with rates starting at B1,800 per night that are the closest thing in Poipet to five-star, plus the widest range of facilities, including six restaurants, a spa, salon, gym and duty free shop. “Other casinos are cheaper but don’t have the quality,” Mr Lim says. Holiday Poipet is adding 230 rooms, scheduled to open next month, but Mr Lim knows that won’t be enough. “The hotels are full on weekends,” he says. “There should be 5,000 hotel rooms in Poipet”


Mr Lim contends, “For hotel rooms, we are the best.” But he voices the consensus opinion that “Star Vegas is the best casino in Poipet.”

Donaco International is betting $360 million on Star Vegas, and the broader proposition of Poipet’s continued prosperity and growth. “It’s been a very successful gaming strip. Star Vegas is the most successful property on that strip,” Donaco Executive Director Ben Reichel says.

The company’s investor presentation says Star Vegas, located at the far end of the strip leg paralleling the border, had 2014 EBITDA of $60 million from its 385 hotel rooms, 109 gaming tables and 1,264

gaming machines, 288 owned outright and the rest on revenue share deals. “Star Vegas in Poipet is, in our view, a best-in-market asset and is the only resort in Poipet for which an argument can be made that it is approaching international standards,” Union Gaming Research Macau wrote in a positive review of the deal after it was announced in January.

Donaco foresees little capital outlay required at Star Vegas over the next five years, “except buying more slot machines as the business expands,” Mr Reichel says, “The public areas are much higher quality than other casinos,” with fresh carpets, high ceilings—some featuring the property’s star logo—clean lines, and a performance lounge that screams potential. The property, opened in 1999, also has a swimming pool, its own power infrastructure, water supply from a lake with purification and recirculation facilities on site, and even its own fire engine.

Hotel rooms, with rates from B850 to B1,500, aren’t five star and haven’t been a focus under outgoing ownership, Mr Reichel says. “The hotel just has to meet market expectations. They make very little money from rooms. They’re almost all comped.”


Star Vegas will serve as a bookend to Donaco’s Aristo Internationalcasino hotel in Lao Cai, Vietnam, where players from neighboring Yunnan Province walk in from China with their ID cards and play in Chinese renminbi. For Donaco, the acquisition is about diversification—a Thaifacing property complimenting a China-facing one—not synergies, but there are key similarities between the properties.

“Operating conditions are very similar to what we know in Vietnam,” Mr Reichel says. “It’s an area that Thai players can cross over to without a visa. Even though they’re in Cambodia, they gamble using Thai baht, so don’t have to change money. Star Vegas cage and casino staff are all ex-Genting, Genting trained, so the operating procedures are the same as Aristo.”

On the regulatory side, Mr Reichel concedes Cambodia’s regime is “pretty ad hoc. Licenses are issued annually, but if you pay your taxes, there’s certainly no issue of getting the license renewed.” Casinos are exempt from the 20% corporate income tax, and levies are per gaming device only, not revenue. “One key thing is that the government doesn’t tax you on a percentage of profits,” he says. “Our assumption is that taxes will increase gradually. From such a low base, it’s still going to be very minimal.”

On money laundering, Mr Reichel says, “Cambodia has been a focus country for Financial Action Task Force, the inter-governmental group that looks after money laundering. They’ve acknowledged Cambodia has made significant strides in recent years. They’ve got the right laws in place. They’ve got a regulator in place. There may be some issues in terms of enforcement but at least they’re getting there in terms of the structure.” He adds that Donaco will monitor the issue closely and ASX, the Australian stock market, didn’t raise concerns about the deal.

Donaco rightly calls the acquisition “transformational.” From a single-asset enterprise—Donaco completed selling off gaming technology assets last year—the deal gives it geographical and market diversification. The deal is also the equivalent of a minnow swallowing a whale. Donaco estimates the deal will increase its 2015 revenue nearly five-fold to A$228.3 million ($177.3 million) from A$38.8 million, quadruple EBITDA to A$99.9 million and boost net profit to A$80.7 million. Looking at it another way, with the completion of the merger, Star Vegas would account for 84% of Donaco’s estimated 2015 revenue, 77% of EBITDA and, after deducting interest costs related to the acquisition, 80% of net profits.


“The Star Vegas deal is a lot bigger than a lot of people were expecting,” after the company announced last year it was negotiating an unspecified Cambodia acquisition, Mr Reichel says. “A lot of people in the industry didn’t realize how much money Star Vegas makes. The total deal size is $360 million, but it’s important to remember one-third of that is in Donaco shares.”

To finance the transaction, Donaco secured a $100 million loan at 6.85% from Taiwan’s Mega International Bank. Mega Bank’s cataloguing of assets to secure the loan has delayed the deal’s closing from April to July, Donaco says. The company raised $100 million through an equity offer to shareholders and will issue 147.2 million shares, valued at $120 million, to the seller, Thai businessman Somboon Sukjaroenkraisri and his son Lee Bug Tong.

“It could almost be seen as a backdoor listing of Star Vegas, since the business we’re acquiring is much larger,” Mr Reichel says. “But the critical point is that the vendor is only getting 18% of the company. Usually in a backdoor listing deal, the vendor would get 80%. So we think it’s a very good deal for our shareholders and that’s why it’s been so widely supported.” The shareholder vote in March showed more than 99% approved the deal. Union Gaming notes the purchase price of six times EBITDA is a discount to its 8.5 times earnings valuation for NagaWorld.

Not everyone is convinced it’s a great deal, though. “That’s a large amount of money to pay for a property facing two major risks,” Spectrum Asia CEO Paul Bromberg says. “First, Cambodia- Thailand border conflict: border skirmishes could close the border overnight as has happened before. Second, the Thai government could legalize casino gaming in Thailand. That is unlikely to happen in the foreseeable future, but it would kill Poipet overnight. If the Thai patrons don’t have to drive three-and-a-half hours there, they won’t.”

Donaco feels it has mitigated its risks through the sale agreement that includes a two-year guarantee of $60 million in EBITDA, a sum that would nearly cover Donaco’s cash outlay. The seller is also signed to a two-year management contract. “It’s a transition period for our team to learn every detail of the business, relationships with junkets, kind of a handover period,” Mr Reichel says. There’s no management fee for the seller, but a potential percentage of profits if the earnings target is met.

There’s also the question of growth for Star Vegas and Poipet overall. “There are eight casinos that have been doing this for 15 years,” Global Market Advisors’ Mr Klebanow says. “Some new operator isn’t going to do anything they haven’t tried already.”

“Star Vegas is a very well established business but we think it’s got plenty of growth in it,” Mr Reichel replies. He reports Donaco has talked to Malaysian and small Macau junket promoters about visiting Star Vegas, but admits bringing in non-Thai players would require changes, such as Mandarin-speaking dealers and Chinese food.

“We see organic growth from upgrading of the road and rail infrastructure from Bangkok,” Mr Reichel says. “By end of the year, that should be a pretty comfortable two-and-a-half hour drive.” Transport improvements are part of the larger ASEAN Economic Community initiative to allow free movement of goods between the ten countries of the Association of Southeast Asian Nations. Equally important, the initiative should also lead to 24-hour border opening by year’s end. Thailand is also considering a special economic zone on its side of the border to encourage more business development along what’s already a thriving trade route.

“On the whole we think Poipet has quite a bit of growth ahead of it,” Mr Reichel says. “Unless you go under the assumption that in Thailand gambling is going to be legalized, which we don’t think is a possibility in the short term or even medium term.” Donaco has $360 million riding on that opinion.


Editor at large Muhammad Cohen also blogs for Forbes on gaming throughout Asia and wrote Hong Kong On Air, a novel set during the 1997 handover about TV news, love, betrayal, high finance and cheap lingerie.


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