Union Gaming Research Macau released the following note on 27th June:
Several media outlets are reporting that MPEL is in the final stages of entering into an agreement with Philippines’ Belle Corp (ticker: BEL.PSE), which is developing one of the four Manila Bay IRs. Terms of the deal are unknown, although we would only want to see MPEL enter into any transaction in the Philippines in a capital-light manner (i.e. management services agreement). In our view, we think MPEL can generate better returns on capital elsewhere, namely Macau (Macau Studio City and another hotel tower at City of Dreams), while we think better and lower risk greenfield opportunities exist in likely future markets such as Japan and Taiwan.
We aren’t totally sold on the Philippines
The Philippines is currently about a USD1.2bn GGR market, with Resorts World Manila generating approximately half of that figure and all other casinos (Pagcor and Pagcor licensees) generating the other half. The vast majority of GGR is generated by locals rather than international visitors. We are not sold on the concept of the Philippines (and Manila specifically) becoming the #2 Asian gaming market behind Macau, let alone being big enough to support an additional four major new IRs.
We do, however, acknowledge that Genting Hong Kong’s (678.HK) Resorts World Manila has been a success given its first-mover advantage, its access to the airport, and physical plant being significantly superior to existing competitors in the Manila area. In 2011, Resorts World Manila generated USD659mm in net revenue and 214mm in EBITDA (33% margin), which pencils out to nearly a 40% ROI.
In our opinion, there are several factors working against the Philippines as it attempts to make itself the next Singapore (in fact, Pagcor officials recently forecasted that the market will generate USD10bn+ in GGR by 2016).
· Location: Manila is a 2½ hour flight from Guangdong and a 3½ hour flight from Singapore. Prospective gamblers from China and SE Asia (Singapore, Malaysia, Indonesia) would have to bypass the casinos in their own backyards, which also happen to have superior product relative to the planned Philippines IRs (as measured by invested capital).
· Perception is reality: Manila has a reputation as being unsafe, unclean, and impoverished. While this might represent an unfair generalization of the area, we think it could be enough to dissuade customers, especially those from countries like Japan, South Korea and Singapore from making a purpose-based trip to a Manila IR.
· Language barrier: outside of the IRs, Chinese is generally not spoken, nor is signage in Chinese. We believe this could dissuade Chinese patronage, which we believe is the demographic that most of the new IRs believe will be their primary customer.
· Government hostilities: there is an on-going rift between the governments of China and the Philippines over disputed ownership of an island in the South China Sea. In May 2012, many Chinese travel agencies temporarily suspended the operation of package tours to the Philippines as the dispute heated up. This being said, China was the #4 inbound source of visitation to the Philippines in 2011 with 243k visitors, having grown 30% from 2010. In Singapore, 1.4mm Chinese visited in 2011, or almost 6x the amount to the Philippines.
· It’s a locals market: we believe only a small percentage of GGR is generated by foreigners, with the vast majority coming from locals. In order for the new IRs to succeed, they will need to significantly increase the GGR generated from international visitors.
· On a positive note, Manila IRs should be able to offer higher commission rates given that the gaming tax rate is favorable relative to Macau (15% vs. 39%), but is a bit higher than Singapore (~12%).
Belle Corp’s Belle Grande Manila Bay and Entertainment City Manila
Belle Corp’s USD1bn Belle Grande Manila Bay is one of four IRs planned for Manila Bay’s Entertainment City Manila. It, along with Bloomberry’s Solaire (which has a managed services agreement with former LVS executives Bill Weidner and Brad Stone), is expected to open next year. Belle Grand Manila Bay is expected to have 880 hotel rooms, 350 table games and 1,900 slots and will open in 2H13. Two other IRs are expected to open in the coming years, including projects by Travellers Group (developer of Resorts World Manila), and Kazuo Okada’s Universal Entertainment. We note that Belle Grande Manila Bay already entered into a casino management services agreement with Macau’s Asia Pacific Gaming (former Galaxy StarWorld executives).
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