Inside Asian Gaming

inside asian gaming April 2015 21 Cover Story S outhKorea’s 16 foreigner-only casinos are fast becoming an anachronism in a continent increasingly replete with the latest and greatest destination-scale gaming resorts. The largest and best-known currently operating foreigner-only casino was opened in 1968 at the Sheraton Walker Hill Hotel in the capital, Seoul, one year after the sector was legalized. It’s got 79 tables, twice the average among its peers. In 2014, foreigner-only casinos generated about 1,378 billion won (US$1.25 billion) in gaming revenue, essentially flat from the year before. To emphasize the sector’s modest size and its potential for growth, observers contrast that figure with Macau’s casino revenue, which last year was 35 times greater, at $43.9 billion. It’s a sensationalistic comparison, but there is perhaps some merit in making it because the two markets aren’t as different as they appear at first glance. Macau’s casinos, though technically permitted to serve locals, derive a virtually insignificant proportion of their revenue from them. The bulk of the take at both Macau’s casinos and Korea’s foreigner- only venues is supplied by players from mainland China. The split between VIP and mass market is also fairly similar across the two markets. There’s a big difference in capacity, though, with about 620 gaming tables across Korea’s foreigner-only sector, versus 5,700 tables in Macau, making a pound-for-pound comparison between the two markets more meaningful than a top-line revenue comparison: the average Macau table generated $7.7 million last year, close to four times the yield of the average Korean foreigner-only table, which made $2 million. There is arguably sufficient demand in Korea’s neighborhood to support a casino industry with a capacity close to that of Macau’s, even if the ban on domestic play remains in place. Not “Real” Casinos As capacity increases, yields generally drop—in economic theory it’s known as the law of diminishing returns. The reason an average table yields so much more in Macau than in Korea is the two markets don’t offer comparable products. Over the past decade, lavishly appointed resorts unveiled in Macau, Singapore and, most recently, the Philippines, have drastically altered regional gamblers’ expectations of a casino experience. As JP Morgan analyst DS Kim puts it, Korea currently lacks “’real casinos’—that are of comparable scale and quality and have similar offerings as those in other markets—to appeal as a destination to gamblers in the region.” The two markets have different catchment areas, but that doesn’t seem to explain the gap. Macau, situated on China’s affluent southern coast, benefits from its proximity to the wealthy residents of Guangdong province. South Korea’s foreigner-only casinos, meanwhile, enjoy an exclusive position in northeast Asia, providing the closest legal gaming tables to not only wealthy northern Chinese, including residents of Beijing and Shanghai, but also to Japanese. South Korea’s foreigner-only casinos enjoy an exclusive position in northeast Asia, providing the closest legal gaming tables to not only wealthy northern Chinese, including residents of Beijing and Shanghai, but also to Japanese. Two-Way Split: Chinese VIPs Dominate Source: J.P. Morgan estimates Foreigner-only casino revenue by nationality 2014E Foreigner-only casino revenue by segment 2014E Other 16% Japan 22% China 62% Mass 33% VIP 67% Hong Kong Macau Beijing CHINA South Korea Japan Tokyo Seoul