Inside Asian Gaming

June 2009 | INSIDE ASIAN GAMING 25 In Focus markets. ParadiseWalker Hill is only a couple of hours flight from Japan and China—both wonderful target markets,” says Mr Chen. The jury is still out, though, regarding Taiwan’s short list of locations for casinos— the outlying islands of Penghu, Kinmen, and Matsu. It smacks of political compromise. It allows the government to pay lip service to the idea of regional development (rather in the manner of South Korea’s casino programme) while placing practical barriers to day-to-day access by domestic players, thereby possibly placating Taiwan’s anti- gaming lobby. That could have an impact on returns for the project. In the current challenging financial markets, capital spend has to be calibrated very carefully in relation to annual yield on earnings before interest, taxation, depreciation and amortisation (EBITDA), suggests Mr Chen of Harrah’s. “In the ‘good old days’ when investors might have been happy with a 15% EBITDA yield, a project like Walker Hill might have been a one billion dollar project. In today’s market you might only be able to justify a US$400 million project,” he explains. “If you look at Kangwon Land [casino in South Korea] versus Paradise Walker Hill, it’s an open access casino, but a pain in the butt to get to. Yet look at the numbers. It does four times the revenue of Walker Hill next door to Seoul. Kangwon Land is generating twice as many jobs and four times the tax revenue. Open access is critical,” suggests Mr Chen. Location, location, location On Mr Chen’s second point—excellent location—in general terms Taiwan arguably has some important strategic advantages. She has by regional standards a relatively strong domestic market—an affluent population of 23 million people with a proven love of gambling. Las Vegas Sands Corp. estimated that 15% of the US$230 million earned by Sands Macao in its first year of operation came from Taiwanese gamblers. Just as Macau is a comfortable destination for Taiwanese gamblers in terms of language and culture, so Taiwan has all the cultural credentials necessary to make her casinos a home away from home for Mainland customers. That’s provided a political accommodation can be reached between China and Taiwan to ensure delivery of the former’s citizens to its resorts. The emotional and in some cases family and ancestral ties between the population of Taiwan and the people of the Mainland are generally more direct than those between Straits Chinese in Singapore and Malaysia and Mainland Chinese. A question is which of Taiwan’s competing communities stand to benefit from this cross-cultural connection? Mr Liu of Jumbo Technology says Kinmen has as strong or even stronger claims to host one or both of the proposed two resorts as does Penghu. “If you compare them in terms of infrastructure—water supply, food supply, electricity and transport facilities such as airport facilities, Penghu is not really ready,” says Mr Liu. “Kinmen is nearer to being ready. So the local government [on Penghu] has some more work to do. From the point of view of the weather and scenery, are all four seasons suitable for travellers, or will they [the resorts] only be able to do business in the summer time because in the winter it’s too windy?” he adds. Penghu has certainly been singled out as having a particularly bracing and windy climate during the winter months. Kinmen is no tropical paradise either in the winter, but it does have the virtue of being only ten kilometres from the coast of southern China. “Kinmen, is more likely to be considered than Penghu, though it’s not confirmed yet,” suggests Mr Liu. “Kinmen is close to Xiamen in Fujian province. It’s only ten kilometres offshore. The mayor of Kinmen has announced he would like to build a bridge from Kinmen to Xiamen. Xiamen is a very prosperous city in the southern part of China. This bridge is 95% confirmed as a project, but who will spend the money? Some say the Chinese government, others say the Taiwan government. The estimated cost of this bridge is US$120 million. If the bridge is built, visitors from Mainland China won’t need to take a ferry. They will be able to drive there in 15 minutes,” states Mr Liu. “The number of tourists to Kinmen right now is around 400,000 per year. In 2016, if a casino resort is built, some estimates suggest the number of tourists could be tripled to 1.2 million,” he adds. Mr Chen of Harrah’s says the longer the journey time to a casino the greater the disincentive to make frequent trips. “Customers do not like to travel to get to a casino. It’s a fact,” he asserts. “If you take Las Vegas as an example, if you live within an hour’s drive you may go ten times a year. Make that a one-hour flight and the frequency drops to six times per year. Make it a two-hour flight and it goes down to three times per year. Make it a three-hour flight and it drops to once every four years. Location is critically important. “Within a one hour travel radius of Macau, there are about 50 million people who are economically eligible to gamble. Las Vegas has about 40 million,” he adds. “In both jurisdictions, about 55% of visitors drive there. In Macau’s case visitors from the Mainland drive to the border and then get a bus or a ferry. If you took those people out of the equation and you had only the 5% that fly into Macau or the 45% that fly into Las Vegas, I can guarantee you wouldn’t see a project like The Venetian Macao or Caesars Palace Las Vegas. Taxing time On Mr Chen’s third point, competitive tax rates, Taiwan looks set to score poorly compared to its nearest neighbours Macau and the Philippines. In Macau the tax on VIP and mass market play comes in at just under 40% of the gross, while in the Philippines it’s 15% of the gross for the high roller market, and 25% of the gross for the ‘grind’(i.e., mass market tables and slots), plus an additional 2% levy on the gross in each segment for “restoration of cultural heritage”. “NoteverymarketcanbelargelikeMacau and Las Vegas, so it’s critically important that the tax rates are set right,” says Mr Chen. “Here’s an example of two markets in Europe. One is a 10% tax rate market and the other is a 92% tax rate market. Guess what’s happening in Spain, capital crisis notwithstanding? We [Harrah’s] are building the largest integrated resort in the whole of Europe—Caesars España. Why can we afford to do that? Because they [the Spanish] have great tax rates. We can afford to build more hotel rooms, more entertainment and more amenities such as golf courses etc. In Germany they have a 92% tax rate. If you’ve ever been to a casino in Germany it’s not a fun experience. You’ll be lucky if you can find a bathroom in the facility. Taxes have an impact on the quality of the project,” he explains. “People like us look very carefully at tax