December 27, 2004

ASIA HITS THE JACKPOT

Blackjack in Singapore? Poker in Pyongyang? Casino operators are hoping to cash in on gambling’s new frontier

By Eric Ellis

Asians know a thing or two about getting rich from chips. They have nurtured their best companies into blue ones. They have profited from China’s red ones. And they have built most of the microprocessors that power the world’s computers.

Now stand by for the region’s latest chip bonanza—the gambling variety.

Casinos are poised to be Asia’s next boom industry - with plans to build fabulous pleasure domes on drawing boards from Pyongyang to Phuket, even in buttoned-down Singapore. For Asia, it’s a crapshoot that could be worth more than $120 billion, an industry equal in size to the Thai economy. Little wonder that governments in Indonesia, Taiwan, South Korea and Thailand are anxious for their share of the tables—and of the 150,000 tourism and construction jobs that should spin off them.

Why the sudden rush? In a word, taxes. Jonathan Galaviz, a Las Vegas industry consultant, estimates that only about 10% of the region’s gross gaming revenues are being taxed by Asian governments. The rest are illegal. Compare that with the well-developed U.S. market, which Galaviz says will generate about $80 billion in gross revenue this year, almost all of it state-sanctioned and taxed. “Sure, Asians will have a big legal opportunity to gamble when these new casinos come on-stream,” says Galaviz, “but it’s the governments that will be the big winners from this.”

Indeed, while Asians may know their way around a roulette wheel or a fan-tan table, the same can’t be said for their governments, which struggle to balance the obvious economic benefits of gambling with its social impact. Sanctioning a casino in Cambodia, with its extreme poverty, or in Indonesia, which has the world’s biggest Muslim population, is not a sure bet. “It’s a very delicate thing to get the balance right,” says Ivy Goh, a gaming analyst with G.K. Goh in Kuala Lumpur. "But the industry could double in three to five years if it gets it right.”

Galaviz expects Asia’s casino regulators to extract returns at least equal to the 40% tax rates imposed in Macao, Asia’s main gaming center. Put another way, that’s $40 billion in state coffers that governments don’t have today. While the lure may seem irresistible, it will be difficult to take the title “Asia’s Las Vegas” away from Macao, the former Portuguese colony near Hong Kong. Macao accounts for about 70% of the region’s legal tables, with Australia and Malaysia a distant second and third. Until recently octogenarian billionaire Stanley Ho’s Sociedade de Turismo de Macau group had a monopoly on gambling there and owned most of Macao’s major hotels as well. But Macao’s 1999 transfer of sovereignty to Beijing—and China’s rising incomes—have changed the game for Ho, who runs a well-oiled but downmarket machine that relies on ferrying punters from Hong Kong.

In 2002, Macao’s government issued licenses to Las Vegas tycoons Steve Wynn and Sheldon Adelson, both of whom have bet heavily that Asians want not only to gamble but also to be entertained. Wynn’s $300 million casino isn’t scheduled to open until mid-2006, but Adelson’s sprawling Sands Macau complex opened in May and was an immediate success. A September filing to the U.S. Securities and Exchange Commission revealed that in June and July the Sands, which offers 200 varieties of Chinese tea, had enjoyed a “table drop” (the amount wagered and lost at games and slot machines) of $608.2 million and net income of $36.9 million. Analysts say that Macau, which reported 2003 casino revenues of $3.6 billion, compared with Las Vegas’s $4.8 billion, could become the world’s top gambling center next year.

While the Americans are a challenge to Ho’s franchise, he is determined to fight back. Last month another company he controls, Melco, announced a $165 million joint venture with Australia’s richest man, Kerry Packer, to open a luxe casino and hotel complex in Macao by 2007. For Packer, the biggest casino operator in Australia, the move provides offshore expansion. And in Packer, Ho gets an established player more skilled at operating the family-oriented entertainment end of the business.

The two have also made overtures to build a casino in Singapore, as have several other Vegas operators. “We are looking at opportunities in Macao, and beyond,” says Alan Feldman, senior vice president of MGM Mirage, one of the Singapore suitors. “We figure there is a pent-up demand in Asia for the type of all-round entertainment package we provide.”

Still, there are obstacles. Singapore’s new Prime Minister, Lee Hsien Loong, has called for “an appropriate middle way, where we can have our cake and also eat most of it.” But he’s facing Christian opponents within his own party who object to casinos on religious grounds.

Meanwhile, Asians haven’t forgotten the old ways of hitting the jackpot. In early September, Melco’s shares were trading on the Hong Kong exchange at 32 cents. By late November, after the Packer deal was announced, they peaked at $1.66, with not a sod turned on the Macao project. That’s better than betting on black.