Scientific Game

Borderline Case

Chronic oversupply of properties could threaten Cambodia’s frontier casino trade

Friday, 01 October 2010 16:52
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Border casinos have a long and in some cases illustrious history. What is Macau if not a collection of glorified border casinos, initially serving Hong Kong and now open for business with mainland China?

Macau has followed Las Vegas in embracing big business and leaving its gangster-tinged Wild East roots behind in favour of earnings conference calls and weightings in investor portfolios. But there are in Asia still plenty of operations true to the swashbuckling traditions of cross-border gambling.

Cross-border casino business can be seen as the ultimate expression of the laws of supply and demand in legal trans-national trade. For it to flourish, a number of conditions must be in place. One is that gambling must either be illegal or restricted for the nationals on one side of the border. The most obvious example is the cross-border casino trade between Macau and the Chinese mainland. There are also border casinos in Vietnam (for example Laocai International Casino on the banks of the Red River opposite Hekou in China); Laos (such as Savan Vegas resort on the Lao-Thai border) and Myanmar (small operations mostly located on the border with China in the regional states of Shan and Katchin.

But the daddy of international-standard cross-border casino proliferation in Asia is Cambodia. It has the good fortune, if that’s the right phrase, of sharing borders with Vietnam and Thailand. The former has casinos but limits entry to foreigners or Vietnamese with foreign passports. The latter bars casinos completely.

In the second quarter of this year, Cambodia had 26 casinos scattered along its extensive borders with Vietnam and Thailand. And more are planned. Entertainment Gaming Asia, formerly Elixir Gaming Technologies, announced at the end of May that it had been granted a casino licence by the Cambodian government for a project, dubbed Dreamworld Casino and Resort, in Takeo Province, near the Vietnam border. Dreamworld is slated to include a casino and hotel on more than seven acres (30,000 square meters) of land.

Cambodia’s border casinos are country cousins compared to the slick multi-billion dollar offerings created in Macau. But they do represent a significant amount of capacity for the regional industry. If each casino had only ten tables and 20 slots, that’s still 300-odd casino tables and 500-plus slot machines. Chateau Bavet, developed by the Malaysian slot manufacturer RGB in the border casino town of Bavet, has 60 tables and 170 hotel rooms on its own. It all adds up in theory to a healthy second-tier market for casino equipment suppliers. A number of the major equipment suppliers do not, however, sell directly into the border casinos because of concerns about the financial probity of some of those operations and the possibility of falling foul of the regulators in their home markets.

Those suppliers are probably right to be cautious. Many border properties in Asia are by definition provincial—stuck in the wild and woolly outer reaches of countries that may already have a somewhat sketchy interpretation of niceties such as anti-money laundering laws or copyright rules. If some Asian border casinos are willing cheerfully to rip off the name of a major Las Vegas brand and pick it out in neon lights on the front of the property, what could be going on in the darker recesses of its counting room and on its balance sheet, not to mention in the offices or minds of its local ‘regulator’?

The answer is, we don’t know and are unlikely to learn more any time soon. The companies involved are usually privately held. Provided they satisfy the local authorities by paying whatever licence fee and/or tax liabilities they have, then what happens to the money after that is apparently nobody’s business but theirs. Some of these border entities have managements shrewd enough to put citizens from Western countries in middle or senior management positions, but how much oversight they have of the money is anybody’s guess.

Cambodia’s border casinos have sprung up within the last ten years—many of them in a sudden growth spurt in the last five years, riding on the back of a general upswing in optimism about rising gaming industry revenues in Asia. But if recent events are anything to go by, many of them could disappear almost as quickly as they arrived.

The recent news of the closure of Winn Casino in Bavet, on the border with Vietnam, is merely the outward manifestation of a malaise that has been affecting the border casino trade for some time—a chronic oversupply of venues.

For a case study of the potential perils that face Cambodia’s border casinos, Bavet is not a bad place to start. It would be lucky to qualify even as a one-pony town. The rationale for its existence is as a border crossing from Moc Bai in Vietnam into Cambodia’s Svay Rieng Province. Once you pass over the border, you’re on Bavet’s casino strip. There’s no pretence even of locating the properties discreetly some distance from the border gate as there was in the early days of Stanley Ho’s monopoly in Macau.

In 2009, Svay Rieng province was ranked 13th out of 24 for its level of poverty according to statistics from the United States Agency for International Development. A total of 76% of its half million population work in agriculture. And yet tiny Bavet has 14 casinos, plus at least two more projects apparently under construction. In theory, Bavet has a favourable location for border casino business. It is not much more than an hour by road from Ho Chi Minh City in Vietnam, that country’s biggest urban centre with a population of 7.1 million at the 2009 census. Many of those people are passionate gamblers who aren’t allowed to visit Vietnam’s casinos unless they have access to a foreign passport. In reality, however, an hour’s commute to Bavet can stretch into a much longer journey due to Vietnamese red tape that can vary in length from week to week and even day to day.

And there, in essence, is the difficulty with Cambodia’s border casinos. They are marginal operations in more than one sense. Not only are they vulnerable to regional politics, but they also seem more vulnerable to external economic shocks than core markets such as Macau or even the Philippines—possibly because of their reliance on mostly low rollers. Vietnam’s GDP grew by 6.4% in the second quarter of 2010, according to Vietnam’s General Statistics Office, but that doesn’t seem to be translating into Vietnamese high rollers visiting Bavet. The arrival in the regional market of Singapore’s casino resorts may not be helping Cambodia’s border trade. Hanoi is less than three hours by plane from Singapore. And Sheldon Adelson, the Chairman and Chief Executive of Las Vegas Sands Corp, specifically mentioned during his company’s second quarter earnings call that Vietnamese VIPs were among his early customers at Marina Bay Sands.

Cambodia’s tourism sector has also been slower to recover from the global economic shocks of late 2008 than more mainstream markets. The 2008 figures were the first time Cambodia’s tourism growth dipped below 5.5% annual growth since the severe acute respiratory syndrome (SARS) epidemic of 2003. The fact that Bavet’s border casinos are all small-time operations competing among themselves also means they don’t have any critical mass allowing them to organise marketing, promotions and inward transport on a resort-wide basis.

Perhaps the key problem facing Cambodia’s border casino trade, though, is a chronic oversupply of venues. That’s due to the apparent willingness of the Cambodian authorities to issue casino licences to all comers outside of the capital Phnom Penh on the understanding that the operators must shoulder the commercial risk that involves.

The Cambodian government doesn’t charge specific taxes on gross casino revenues. Would-be operators must pay for a gaming permit issued by the Ministry of Economy and Finance, then pay a flat monthly levy on their business. If the authorities were acting purely in the national interest, they would probably want to consider the sustainability of such border casino businesses, and their impact on the wider economy. If individual officials were motivated by more personal interests, or looking for a quick fix to aid an economically depressed area, then they would have an incentive to issue as many gaming permits as investors are willing to apply for. An oversupply of permits with little regard for strategy mirrors exactly the problems that beset the Phnom Penh gaming clubs market. There, it resulted in cannibalisation of the market. An aggravating factor in that case was that Cambodians were being allowed in the slot clubs in contravention of existing national laws.

There may still be some foreign investors who think the roads of Bavet and other Cambodian towns such as Poipet on the border with Thailand are paved with casino gold, but locals with good inside knowledge seem to think differently. Kevin Pham, formerly one of the people running the Winn Casino in Bavet, apparently decided some time ago he could make better money in real estate and decamped to Vietnam to pursue that trade instead.

As one industry insider told Inside Asian Gaming: “The situation in Bavet is not good. The gaming ‘pie’ isn’t even the size it was two years ago before the international crash. With the new properties in the market it means that a smaller pie is being cut into even smaller portions.”

The source gives an at-a-glance assessment of the performance of the current casino inventory in Bavet. It doesn’t make happy reading for any investors or suppliers with exposure to the market.

“On the right hand side as you come from the Vietnam border you have an empty construction site apparently earmarked for a casino. Then there’s Mocbai 1, which seems to be doing okay. Mocbai 2, next door, is a newcomer, and doesn’t seem to have any business. Next is Chateau Bavet, RGB’s casino. Things look bad here. It’s currently up for sale with a price tag of US$20 million. Then there’s Las Vegas Sun, which seems to have less action than it did a few years ago. Next to that is a small newcomer so underwhelming I can’t even remember its name. Next to that is Winn, and you know what happened there,” added the source.

“On the left hand side as you come from the Vietnam border, there’s King’s Crown, which was recently bought out for US$10 million. That pricing is, I think, indicative of the way the local market is currently discounting the value of Bavet’s border trade. It won’t make it easy for RGB to get its USS$20 million asking price for Chateau Bavet.

“Next on the left hand side is a newcomer called Silver World. After that there’s a new project, then there’s the Royale. Next door to that is Suncity, which I think changed hands recently. Then there’s the New World, Le Macau and Titan, [formerly known as Caesar International Hotel]. Last, and very much the least, is the VIP. To my knowledge it’s had three different owners this year,” stated the source.

“Bavet can provide a reasonable business for three to four casinos. But not ten or more casinos. I simply can’t understand why people are still planning new projects,” said the insider.

Another source spoken to by IAG said: “A lot of the [casino] properties in Bavet are simply real estate deals. A developer builds a casino and then tries to sell the property to an outside party. Another problem is that not only do players coming from Vietnam get hassled by the Vietnamese authorities on the way in—if they try to take foreign currency back into Vietnam the border guards try to extort money from them. These problems end up showing in the figures. I have heard that the slot machines in Bavet are doing less than US$15 per day on average.”

It’s difficult to know whether Vietnamese officialdom’s attitude towards those Vietnamese nationals trying to gamble in Bavet is mere opportunism or reflective of a wider official policy. There have certainly been signs recently that Vietnam’s government is steering towards a possible policy of regulating and taxing its population’s obsession with gambling in order to try and suppress unlicensed Internet gambling. There has been talk of setting up a state-run lottery and a state-run sports betting operation. The government has solicited bids for technical assistance for such operations from international suppliers of lottery equipment and management services according to the Vietnamese media. But so far there has been no official word as to whether Vietnam plans to put the proposals into effect.


A Winn Lose Situation

The troubles of Bavet’s Winn casino may have wider implications

In late September, the Phnom Penh Post reported that Winn Casino in Bavet had closed due to bankruptcy, leaving 300 locals jobless.

An industry insider spoken to by Inside Asian Gaming suggested the police sealed off the property on 28th September, while the local authorities sought assurances from the owners that outstanding staff wages would be paid.

The source said: “Kevin Pham, who was owner or part-owner of Winn, hasn’t operated the casino for a while now. My understanding is he left it in the control of his wife and then latterly of his brother-in-law. Kevin himself is doing real estate business in Vietnam and earning more money there.”

A local property agent—Khmer Real Estate Co—has been given the job of seeking buyers for Winn Casino, according to the Phnom Penh Post. The newspaper added the agent is also working on the marketing of two other Bavet casinos where the owners are wishing to sell, though the agency declined to identify the properties.

Chrun Theravath, chief of casino management at the Ministry of Economy and Finance, told the Post he was aware of the closure of Winn Casino, but that the company had not officially declared bankruptcy.

“I know that the casino has shut down, but so far, there is no written official letter to inform the ministry,” he said.

He said that the casino—which began business in early 2010 under ownership of an unnamed Vietnamese-Canadian national—was likely built with the intention of renting or selling the property, but was unable to find a buyer.

Another Ministry of Economy and Finance official confirmed that the business had shut down, and said profits at casinos in Poipet near Thailand and Bavet on the Vietnam border had slumped in recent months.

Some 27 casinos have licences for operations in Cambodia, but tax revenue from the sector declined US$17.5 million from 2008 to 2009, representing a 7% or 8% drop overall, said Ros Phearun, deputy director of the finance industry department at the Ministry.

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