Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

I am a 25+ year c-level executive of the casino industry in operations, marketing, international development and strategic planning. Currently, a consultant specializing in the casino space. Industry expert contributor and publisher of a subscription letter called "The House Edge". Extensive experience in marketing and development in the Asian gaming market while a senior executive at Caesars, Ballys Grand and Trump Taj Mahal.
Part of senior executive teams that valued acquisitions and mergers with companies in the casino, hotel, d entertainment rant  and restaurant space.

Global Gaming and Casinos Industry Specialist

Equity Bottom-Up

<ul>
<li>Confusion reigns supreme as officials from Pagcor and President Duterte seem to be reading off different pages.</li>
<li>Pagcor CEO calls for expanded "Vegas type" cluster at Entertainment City while Duterte insists, not on my watch in anti-casino statements.</li>
<li>Uncertainty dogs one of Asia's most potentially hot gaming runways to 2020.</li>
</ul>In previous SK insights, we saw all the stars aligned for Philippine gaming, driven by a positive tone to GGR growth, national demos, its status as a VIP haven for jittery Macau players and proxy bettors. This past August 17th, we expressed specific concerns about President Duterte's flat anti-casino statements. His sudden dismissal of the commission which had recently approved a new casino property to be built on Boracay Island by Landing International Development Ltd(0582HK) was unsettling for those inclined to buy into sector stocks. The President had ruled out casinos on the island, having first cited the need for environmental cleanup. Now after 7 months, that process is complete and Landings presumably is ready to go ahead. But the presidential slam down of the commission that awarded Landings the go-ahead, was promptly dismissed. Yet Landings insists it will move ahead with plans for groundbreaking, citing the legality of the process by which it received the approval.On top of this, Ms. Andrea Domingo, CEO of Pagcor, the agency that both regulates all casinos as well as owning 46 of them, aired support for an expansion of Entertainment City from its current five operators to a cluster of "Las Vegas Strip" style casinos. The operators immediately issued strong statements opposing the idea, citing the necessity for a further moratorium on new properties due to supply getting too far ahead of demand.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/065/961/original/entertainment-city-philippines.jpg?1538667296" class="editor-image img-responsive" data-smartkarma-image-id="65961"></figure><div class="content-caption">The concentration here works now. But a Las vegas strip?</div>Also, Pagcor, which as recently as last Spring, reiterated its intention of selling off all its 46 casinos to the private sector, reversed itself. This time officials cited the profitable results of their properties as the reason for their deciding to keep the casinos. Meantime, existing operators at the surging Entertainment City casino sector in Manila kept moving ahead with plans to deepen their corporate roots in the Philippines.Okada Manila, owned by Japan's Universal Entertainment Corp.(6425T) announced plans to backdoor an IPO of its Tiger Palace subsidiary which owns the Okada Manila property, in order to have the valuation of its Philippine unit establish itself as a separate trading entity. It bought 66.6% of Asiabest Group (ABGol.PS) for US$12m and will insert Okada Manila equity into that company aiming to complete the transaction by the end of this year. However, as Tiger Palace is absorbed into its new corporate shell, it faces, as a separate stock, the growing mixed signals of the government's confused policies.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/065/965/original/download.jpg?1538667645" class="editor-image img-responsive" data-smartkarma-image-id="65965"></figure>Solaire, one of Entertainment City's most popular properties, is majority owned by the interests of the Philippine billionaire, Enrique K. Razon, Jr. He occupies considerable heft in the nation's political and economic life over many years and has been very vocal in his confidence in the growth of the market providing the environment is positive.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/065/962/original/Solaire-20150813.jpg?1538667433" class="editor-image img-responsive" data-smartkarma-image-id="65962"></figure>Malaysia's Genting, Resorts World ( <a href="https://www.smartkarma.com/insights/genting-berhad-attractively-valued-on-5-yr-nav-discount-history" target="_blank" data-smartkarma-citation="insights:21157">Genting Berhad: Attractively Valued on 5-Yr NAV Discount History</a> operates considerable gaming floor space at four Entertainment City hotels totaling 1,500 rooms. The company is planning a further expansion by the end of 2019.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/065/964/original/rw-lg.jpg?1538667597" class="editor-image img-responsive" data-smartkarma-image-id="65964"></figure><div class="content-caption">Genting expects to expand--for now.</div>We have been highly bullish on Philippine gaming stocks, particularly the Entertainment City group. Now as both events and contradictory direction have emanated from high government sources, we are inclined to inject a note of caution in our appraisal of the sector. Should President Duterte and his key Pagcor officials finally begin reading off the same page, we see the outlook for sector stocks there considerably brightening with an upside. The President's term ends in February of 2022, a period long enough for any possibility to arise, be reversed and arise again. Any conjecture at this point as to what the political/regulatory structure could be by that time, or after Duterte leaves office, is anyone's guess and we will not try. What matters now are an appraisal of what we see as the three indispensable elements for a robust, healthy Asian gaming market. How does the Philippines stack up now?<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/065/963/original/ICR-City-of-Dreams-Manila-Belle-Corp-696x476.jpg?1538667549" class="editor-image img-responsive" data-smartkarma-image-id="65963"></figure><div class="content-caption">MLCO to swap old for new equity in property</div>1. Stable government policy. As we have noted in our Sk insight late last month, we noted how government policy and stable institutions, aside from geopolitical questions, contribute to the high potential for Cambodia's gaming industry. Specifically, we cited Nagaworld2's outstanding performance and the possibilities for the stock given that environment. And now, just days ago, Nagacorp ( <a href="https://www.smartkarma.com/insights/nagaworld-sitting-on-asia-s-most-undervalued-gaming-moat-the-stock-is-attractive-at-hk-7-95" target="_blank" data-smartkarma-citation="insights:24517">Nagaworld: Sitting on Asia's Most Undervalued Gaming Moat, the Stock Is Attractive at HK$7.95</a> the company announced it at triggered the first stages of planning a Naga3 expansion. As we noted then and repeat, we believe the shares are positioned for a strong upside.Contrast the clear policies in Cambodia with those of the Philippines. Ideological differences aside what we see here is a private sector in gaming that must demand more clarity from the government as to its future in that country. Will the major Entertainment City operators be vulnerable to the caprice or uncertainties of government policies over the next four years? Will Pagcor continue as government owned, or reverse itself again and begin selling its properties to private sector operators? Or lastly, is there a draconian threat that the President's personal distaste for casinos could result in harsh regulatory policy changes?Grade: Failing2. The extent of the threat of tourism weaponization by China related to geopolitical issues. As we have seen, Beijing will use visa restrictions or outright bans on outbound China tourism to serve its geopolitical ends. It is clear that it is prepared to punish nations aligned with US Asian interest in the economic/military sphere and reward those who warm to its own strategic aims. This is the case as noted in Cambodia. In the Philippines, Duterte has done a dramatic volte-face since his election in 2016. He in effect reversed over 100 years of very close US/Philippine relations by making a considerable effort to closely identify with Beijing. This pivot, by extension into the tourism sector, will assure much immunization from Beijing tourism weaponization. The nation' Department of Tourism has targeted 2 million arrivals from China by 2020 as a primary goal. In 2017, China arrivals totaled 968,497 a y/y increase of 43.33%. The funhouse mirror aspect of this surging tide of China tourism is that the bulk of the arrivals went to Boracay Island--specifically the locale, where Duterte has slammed the door on the plans of Landing International development. But the foundational truth here is clear: Under the Duterte government, a solid underpinning of close diplomatic and economic relations has been established with China. And as a resut, ideological/ strategic implications aside, it is a plus for gaming.Grade: Passing2. The vitality of consumer/tourist gaming demand. By most measures, we use GGR growth as a key indicator of the investment prospects for gaming market stocks in Asia. The Philippines passe this test. In 2017, the nation posted a total US$2.9bn in GGR, a 14% y/y increase matching the double-digit growth YTD in Macau. Of that number, the private sector properties generated PHP 109.35bn (USD$2bn up 25% y/y). Pagcor's 46 casinos across the country, reported GGR of PHP34.38bn, up 8%(USD$600m+). Increases in both mass and VIP led the drivers of these impressive numbers. In response, daily flights to Manila from China departure points have been increased by 4 per day. Flight time from population centers in Guangdong for example, run only 2hours and 2o minutes. The core fundamentals are in place to drive growth in the Entertainment City sector and by extension, should be bullish for the shares.Grade: PassingOutlook 2018: Officials expect a 32% boost in GGR in 2018 largely propelled by the opening of Okada Manila in the Entertainment City complex plus increasing China tourism. So stocks in the sector should anticipate earnings increases and ordinarily signal a buy. Yet we must inject a note of caution for investors until such time as all the key actors in the drama read from the same script.  Until such clarification is made, we are moving our guidance from strong buy to neutral. Too many questions remain unanswered. Will Pagcor finally decide to keep their 46 properties, or sell them? Will they open more? Will development of more casinos in Entertainment City evolve the area into a crowded Las Vegas type of cluster? What will be the final call on Boracay Island development as the company and the government appear to be at loggerheads as to the process by which the development was approved?The premium we saw built into the current trades on Entertainment City operators like Okada, Melco Resorts and Entertainment(NASDAQ: MLCO), Bloomberry and Genting can't be baked into the trade as we see it until the government produces a basis for stable regulatory and development guidelines. So despite positive propulsion for the market in general, we're changing guidance to neutral on the sector.


Confusion reigns supreme as officials from Pagcor and President Duterte seem to be reading off different pages.
Pagcor CEO calls for expanded "Vegas type" cluster at Entertainment City while Duterte insists, not on my watch in anti-casino statements.
Uncertainty dogs one of Asia's most potentially hot gaming runways to 2020.
In previous SK insights, we saw all the stars aligned for Philippine gaming, driven by a positive tone to GGR growth, national demos, its status as a VIP haven for jittery Macau players and proxy bettors. This past August 17th, we expressed specific concerns about President Duterte's flat anti-casino statements. His sudden dismissal of the commission which had recently approved a new casino property to be built on Boracay Island by Landing International Development Ltd(0582HK) was unsettling for those inclined to buy into sector stocks. The President had ruled out casinos on the island, having first cited the need for environmental cleanup. Now after 7 months, that process is complete and Landings presumably is ready to go ahead. But the presidential slam down of the commission that awarded Landings the go-ahead, was promptly dismissed. Yet Landings insists it will move ahead with plans for groundbreaking, citing the legality of the process by which it received the approval.On top of this, Ms. Andrea Domingo, CEO of Pagcor, the agency that both regulates all casinos as well as owning 46 of them, aired support for an expansion of Entertainment City from its current five operators to a cluster of "Las Vegas Strip" style casinos. The operators immediately issued strong statements opposing the idea, citing the necessity for a further moratorium on new properties due to supply getting too far ahead of demand.The concentration here works now. But a Las vegas strip?Also, Pagcor, which as recently as last Spring, reiterated its intention of selling off all its 46 casinos to the private sector, reversed itself. This time officials cited the profitable results of their properties as the reason for their deciding to keep the casinos. Meantime, existing operators at the surging Entertainment City casino sector in Manila kept moving ahead with plans to deepen their corporate roots in the Philippines.Okada Manila, owned by Japan's Universal Entertainment Corp.(6425T) announced plans to backdoor an IPO of its Tiger Palace subsidiary which owns the Okada Manila property, in order to have the valuation of its Philippine unit establish itself as a separate trading entity. It bought 66.6% of Asiabest Group (ABGol.PS) for US$12m and will insert Okada Manila equity into that company aiming to complete the transaction by the end of this year. However, as Tiger Palace is absorbed into its new corporate shell, it faces, as a separate stock, the growing mixed signals of the government's confused policies.Solaire, one of Entertainment City's most popular properties, is majority owned by the interests of the Philippine billionaire, Enrique K. Razon, Jr. He occupies considerable heft in the nation's political and economic life over many years and has been very vocal in his confidence in the growth of the market providing the environment is positive.Malaysia's Genting, Resorts World ( Genting Berhad: Attractively Valued on 5-Yr NAV Discount History operates considerable gaming floor space at four Entertainment City hotels totaling 1,500 rooms. The company is planning a further expansion by the end of 2019.Genting expects to expand--for now.We have been highly bullish on Philippine gaming stocks, particularly the Entertainment City group. Now as both events and contradictory direction have emanated from high government sources, we are inclined to inject a note of caution in our appraisal of the sector. Should President Duterte and his key Pagcor officials finally begin reading off the same page, we see the outlook for sector stocks there considerably brightening with an upside. The President's term ends in February of 2022, a period long enough for any possibility to arise, be reversed and arise again. Any conjecture at this point as to what the political/regulatory structure could be by that time, or after Duterte leaves office, is anyone's guess and we will not try. What matters now are an appraisal of what we see as the three indispensable elements for a robust, healthy Asian gaming market. How does the Philippines stack up now?MLCO to swap old for new equity in property1. Stable government policy. As we have noted in our Sk insight late last month, we noted how government policy and stable institutions, aside from geopolitical questions, contribute to the high potential for Cambodia's gaming industry. Specifically, we cited Nagaworld2's outstanding performance and the possibilities for the stock given that environment. And now, just days ago, Nagacorp ( Nagaworld: Sitting on Asia's Most Undervalued Gaming Moat, the Stock Is Attractive at HK$7.95 the company announced it at triggered the first stages of planning a Naga3 expansion. As we noted then and repeat, we believe the shares are positioned for a strong upside.Contrast the clear policies in Cambodia with those of the Philippines. Ideological differences aside what we see here is a private sector in gaming that must demand more clarity from the government as to its future in that country. Will the major Entertainment City operators be vulnerable to the caprice or uncertainties of government policies over the next four years? Will Pagcor continue as government owned, or reverse itself again and begin selling its properties to private sector operators? Or lastly, is there a draconian threat that the President's personal distaste for casinos could result in harsh regulatory policy changes?Grade: Failing2. The extent of the threat of tourism weaponization by China related to geopolitical issues. As we have seen, Beijing will use visa restrictions or outright bans on outbound China tourism to serve its geopolitical ends. It is clear that it is prepared to punish nations aligned with US Asian interest in the economic/military sphere and reward those who warm to its own strategic aims. This is the case as noted in Cambodia. In the Philippines, Duterte has done a dramatic volte-face since his election in 2016. He in effect reversed over 100 years of very close US/Philippine relations by making a considerable effort to closely identify with Beijing. This pivot, by extension into the tourism sector, will assure much immunization from Beijing tourism weaponization. The nation' Department of Tourism has targeted 2 million arrivals from China by 2020 as a primary goal. In 2017, China arrivals totaled 968,497 a y/y increase of 43.33%. The funhouse mirror aspect of this surging tide of China tourism is that the bulk of the arrivals went to Boracay Island--specifically the locale, where Duterte has slammed the door on the plans of Landing International development. But the foundational truth here is clear: Under the Duterte government, a solid underpinning of close diplomatic and economic relations has been established with China. And as a resut, ideological/ strategic implications aside, it is a plus for gaming.Grade: Passing2. The vitality of consumer/tourist gaming demand. By most measures, we use GGR growth as a key indicator of the investment prospects for gaming market stocks in Asia. The Philippines passe this test. In 2017, the nation posted a total US$2.9bn in GGR, a 14% y/y increase matching the double-digit growth YTD in Macau. Of that number, the private sector properties generated PHP 109.35bn (USD$2bn up 25% y/y). Pagcor's 46 casinos across the country, reported GGR of PHP34.38bn, up 8%(USD$600m+). Increases in both mass and VIP led the drivers of these impressive numbers. In response, daily flights to Manila from China departure points have been increased by 4 per day. Flight time from population centers in Guangdong for example, run only 2hours and 2o minutes. The core fundamentals are in place to drive growth in the Entertainment City sector and by extension, should be bullish for the shares.Grade: PassingOutlook 2018: Officials expect a 32% boost in GGR in 2018 largely propelled by the opening of Okada Manila in the Entertainment City complex plus increasing China tourism. So stocks in the sector should anticipate earnings increases and ordinarily signal a buy. Yet we must inject a note of caution for investors until such time as all the key actors in the drama read from the same script.  Until such clarification is made, we are moving our guidance from strong buy to neutral. Too many questions remain unanswered. Will Pagcor finally decide to keep their 46 properties, or sell them? Will they open more? Will development of more casinos in Entertainment City evolve the area into a crowded Las Vegas type of cluster? What will be the final call on Boracay Island development as the company and the government appear to be at loggerheads as to the process by which the development was approved?The premium we saw built into the current trades on Entertainment City operators like Okada, Melco Resorts and Entertainment(NASDAQ: MLCO), Bloomberry and Genting can't be baked into the trade as we see it until the government produces a basis for stable regulatory and development guidelines. So despite positive propulsion for the market in general, we're changing guidance to neutral on the sector.

Philippine Gaming Sector: Mixed Government Signals Muddy Otherwise Bullish Outlook

Bloomberry Resorts

Philippine Gaming Sector: Mixed Government Signals Muddy Otherwise Bullish Outlook