Scientific Game

The Philippines fights back

Monday, 08 May 2017 17:00
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By Muhammad Cohen | 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. 

 

For the Philippines, 2016 began with stolen millions from the Bank of Bangladesh washing through Manila casinos, featured anti-gambling rhetoric and gaming license revocations from President Rodrigo Duterte. The President, who took office on 30 June after running on a law and order platform, backed up his tough talk by ordering the arrest of Macau junket tycoon Jack Lam. That’s not a formula for success you’ll find in any casino industry textbook, but the Philippines and Manila’s burgeoning Entertainment City had a banner 2016, with success seemingly continuing this year. So what’s going right and why?

Chinese visitor arrivals rose 38% last year to 675,663, supplanting Japan as the Philippines’ number three visitor source behind Korea and the US, while overall visitor arrivals increased 12% to just short of the six million target. However, Chinese tourists are not in evidence on mass gaming floors and insiders say they’re not a main reason for the revival. More important are ongoing improvements to integrated resorts and local infrastructure, plus government policies favourable to the industry.

“The Philippines gaming market is similar to the early stages of Macau and Vegas,” Morgan Stanley analyst Alex Poon wrote in April while increasing the bank’s GGR growth outlook for this year from 10% to 20% and its target price for Bloomberry Resorts, owner of Entertainment City’s Solaire Resort and Casino, by 20%.

While Macau recorded its third straight year of declining casino revenue, 2016 gross gaming revenue in the Philippines rose 19% to a record P149.12 billion (US$3 billion), according to Pagcor, the government’s casino regulator that licenses private operators and owns 46 gaming facilities. The three Manila integrated resorts – Resorts World Manila plus Entertainment City’s Solaire and City of Dreams Manila – accounted for about 60% of that reported revenue.

In late December, Okada Manila began a phased opening as the third Entertainment City resort, and, as it ramps up, is likely to shift the revenue balance further toward the IRs generally and Entertainment City specifically.

“Entertainment City is developing into what the Philippine government envisioned it to be,” City of Dreams Manila Property President Geoff Andres says. “We surprise our guests with the excellent quality of the offering combined with the renowned Filipino service culture. We have international guests that tell us they came to Manila reluctantly, but they are surprised at how nice it is and then we see them come back again and again.”

THREES WILD

“All of us are contributing to critical mass that’s beginning to generate critical mass benefits,” Solaire President and Chief Operating Officer Thomas Arasi says, pointing out that Manila is subsequently becoming a major IR destination. “Looking at growth and geography, how much gaming, how much mass, how much food and entertainment, you have Macau, Las Vegas, Singapore and Atlantic City. Now the Philippines is competing for number three in terms of product offering.”

Solaire, controlled by Philippine ports billionaire Enrique Razon Jr through Manila listed Bloomberry, opened in March 2013 as the first property in Entertainment City, the 120 hectare district on Manila Bay slated to house four IRs plus commercial and residential developments. In late 2014, Solaire opened the all-suite Sky Tower, expanding to 800 rooms, adding a Broadway style theater, meeting areas, additional VIP rooms, space for retail and other features. It overtook Resorts World Manila to become the market leader in gaming revenue and last year won a Forbes Travel Guide five-star rating, “a huge high water mark,” Mr Arasi says, affirming Solaire’s strategy “to create our own brand, a combination of luxury, aspiration and whimsy.”

In 2016, Solaire achieved financially, too, more than doubling EBITDA to a record P10.6 billion and boosting its EBITDA margin from 20.6% in 2015 to 34.8%. Gaming revenue from its roughly 400 tables and 2,000 machines rose 19% to P38.3 billion. Mass table revenue, accounting for 26% of gaming revenue, grew the fastest at 22%, with slots, 25% of gaming revenue, up 19% and VIP, 49% of gaming revenue, up 17.4%. At the top end, Solaire moved away from direct VIP toward fixed junkets, including several from Macau. Its bad debt provisions declined 92% to P204 million.

“Both in VIP and mass, our marketing has been geared toward no one concentration in any foreign market, but spread across sixto-eight national markets, a little like the way Singapore does it,” Mr Arasi, who opened the Lion City’s Marina Bay Sands in 2010, says. “The biggest news is penetrating further into the Asia-Pacific wallet.”

Beyond gaming, Solaire has 20 F&B options from VIP-only Chinese to a food court and recently swapped out a steakhouse for a Korean restaurant. Retail began opening last year and continues filling in, with a Louis Vuitton flagship store – the first new LV in the Philippines in 24 years. Another singular feature is the Sky Range Shooting Club, where guests can take target practice with the club’s selection of pistols and rifles, or even arrange to bring their own. Bloomberry also plans to build a second casino hotel in Quezon City on the north side of Metro Manila, aimed at the local market.

SWEETER DREAMS

The ramp up story is similar at other IRs. City of Dreams Manila, a partnership between Macau’s Melco Resorts and Entertainment (formerly Melco Crown Entertainment) and Belle Corporation, controlled by the family of Henry Sy, the Philippines’ richest person, debuted in December 2014. After a sluggish start, it hired Mr Andres, a Las Vegas and Macau veteran, in November 2015. “It’s now reaping the benefits,” an industry insider observes.

CoD Manila reported US$160 million in property EBITDA last year, nearly triple its US$55 million in 2015, with the top adjusted EBITDA margin in Melco’s resort portfolio, reaching 34.7% in the fourth quarter. VIP roll rose 110% and VIP revenue rose 169% to US$238 million, representing 45% of gaming revenue. Mass table revenue rose 42% to US$153 million and machine revenue rose 53% to US$133 million.

The property is also more aggressively attempting to leverage its unique assets.

“We have three international hotel brands [Grand Hyatt, Crown Towers and Asia’s first Nobu], almost 1,000 rooms, over 20 restaurants and the world’s only DreamPlay, an awesome DreamWorks-inspired play space,” Mr Andres says, plus signature dining and spas at Nobu and Crown. “Our hotel occupancy numbers are quite high and we find ourselves in the enjoyable position of being able to yield the hotel.”

Okada Manila, part of Kazuo Okada’s Universal Entertainment that includes Aruze Gaming and pachinko in Japan, opened half its main gaming floor in December and unveiled the world’s largest dancing fountain – by the creators of the Bellagio’s showstopper – at the end of March, along with a handful of retail and restaurants plus 174 hotel rooms out of its projected 993. Flashing its signature shade of purple that extends to the limousine fleet, Okada expects to open more hotel rooms and other attractions by mid-July. When completed, likely by year’s end, the resort will have 215 mass tables, 185 VIP tables and 1,800 machines.

CANNIBAL LECTURE

The consensus view portrays Okada as a threat to cannibalize revenue from other IRs. But Bloomberry Director of Investor Relations Leo Venezuela contends, “There’s no downside to Okada.”

For the first two months of this year, he says the four IRs in Manila, including Okada, showed 29% growth from a year ago and that without Okada, the total is up 20%, almost evenly split among the three incumbents.

“It’s early days, but that gives us confidence Okada is growing the market,” Mr Venezuela says, adding, “Based on our experience, it takes a while to ramp up. City of Dreams Manila took 18-to-24 months – and they’re an experienced operator.”

In their research note published in April, Morgan Stanley’s Mr Poon and Praveen Choudhary write, “We think consensus is overly concerned about the competition from Okada,” and assign a 9% market share to Okada for this year.

The 1.7 kilometer toll road connecting Entertainment City to Ninoy Aquino International Airport, completed in December, transforms the transport picture. A passenger touching down at 21:00 can be in their Entertainment City hotel room before 22:00, compared with previous transit times that could exceed two hours in extreme conditions. The elevated road, known as NAIAX, also links Entertainment City to the upmarket Makati district.

“We’ve experienced what we hoped – and now that it’s happened, we’re breathing a pleasant sigh of relief,” Solaire’s Mr Arasi says of the expressway. “It’s not just what we thought it would be, but more.”

The toll road isn’t the only new airport-casino link. On 18 April, Resorts World Manila opened its P1.5 billion elevated walkway to NAIA Terminal 3, just 220 meters (723 feet) away, transforming a nearly impossible pedestrian odyssey into an air conditioned 10 minute stroll over moving walkways, capable of transporting 200,000 people daily.

Former Pagcor Vice President Francis Hernando sees the bridge as defensive. “If they didn’t do it, with the expressway connection to Entertainment City, they risked being bypassed,” he says. A direct expressway link to Resorts World Manila is due to open later this year.

STILL BUILDING

Access is a footnote to ongoing expansion of RW Manila, owned by Travellers International Hotel Group – a joint venture between local tycoon Andrew Tan’s Alliance Global Group and Genting Hong Kong. Opened in August 2009 as the Philippines’ first integrated resort, RW Manila, with an 89-outlet mall and 1,500 seat theater, is part of the Newport City complex that includes offices and training facilities for Genting’s Star Cruises and a Belmont Hotel that RW Manila operates.

Marriott West Wing, opened last November with 228 keys, completed the so-called Phase 2 expansion that lifted RW Manila’s room count to 1,454 including the all-suites Maxims and value choice Remington. Marriott Grand Ballroom, opened in June 2015, features the largest hotel ballroom in the Philippines, accommodating up to 4,000 and seating 2,000, plus 30 additional meeting spaces including two wedding chapels.

As management hoped, Phase 2 boosted non-gaming revenue, up 10% last year and 21% since 2014, to P3.8 billion. EBITDA rose 4% to P6.4 billion. Gaming revenue fell 2.3% and is down 16.7% over the past two years, largely due to a 43.3% drop in VIP volume since 2014 as Entertainment City matured. Morgan Stanley’s Mr Poon notes that

RW Manila’s mass volume expanded 8% last year and hit a historic high in the fourth quarter despite more competition. His analysis also suggests increasing use of Maxims and Remington rooms for promotional purposes could be driving mass growth. RW Manila’s Phase 3 expansion is already underway, adding 900 rooms in Sheraton and Hilton hotels plus a new wing at Maxims, as well as doubling gaming space, with the first opening expected next year.

“They’re trying to create a destination of their own,” Mr Hernando says, as a counterweight to Entertainment City. Travellers also has a plot in Entertainment City, where it broke ground in October 2015, but appears “not in a hurry” to build, the former Pagcor official says.

RW Manila Director of Corporate Communications Owen Camayo counters that piling at the Entertainment City site is underway while management “polishes and tweaks” the blueprint. “Now that we’ve seen the other plans, we want to create something unique,” Mr Camayo says.

He insists the project, now known as Westside City Resort, will include an integrated resort, along with residential and commercial elements found in Newport City. Others doubt Travellers would spend US$1 billion, the Entertainment City minimum investment, to cannibalize RW Manila. But as Manila’s center of gaming gravity and growth continues shifting to Entertainment City, following the model of Macau’s flow from the peninsula to Cotai, the pull may prove irresistible.

 

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