By Michael Beer of Citigroup
As Bloomberry Resorts? new $700m Solaire Resort and Casino nears completion, Manila Bay will finally showcase its potential within the regional gaming arena. Reflecting the heightened enthusiasm around the project launch as well as continued interest in gaming in east Asia, Bloomberry?s shares have risen over 30 per cent in just the past five months.
With the addition of new integrated resorts in Manila Bay, the Philippines gaming market is expected to grow by roughly 30 per cent this year and next, following an estimated 26 per cent growth in 2012. By 2015, we believe the market can comfortably reach $3.2bn in gross gaming revenue, with the amount that the house wins up from an estimated $1.6bn in 2012.
Why? Because of the Philippines? strong international visitation, a favorable tax and junket structure, an improved economic climate and ongoing infrastructure improvements, not to mention a new nightclub or two.
A number of gaming facilities already exist in Manila and across the Philippines, mostly operated by the state-owned gaming operator and regulator, PAGCOR, which came into existence in the late 1970s. Now, many of these facilities appear dated and are relatively small in terms both of size and how much revenue they generate. Yet over the past few years, international focus on the sector has risen following the issuance of four private gaming licenses and the creation of the Manila Bay complex. Those new licenses sparked $6bn in recently committed private capital ? and naturally, continued investor interest.
Reflecting this new investment, Travellers, a joint venture between resort group Genting Hong Kong and local conglomerate Alliance Global, is poised to break ground on its roughly $1bn Manila Bay property in the next few months.
Due to be done by 2016, Resorts World Bayshore will help create a clustering effect in Manila Bay similar to that in Macau. While the former Portuguese colony, an hour by ferry from Hong Kong, remains the epicenter of gaming in Asia, we believe the new gaming properties being built in Philippines could have average Ebitda margins that meet or exceed those at Sands China, Macau?s highest-margin operator. Not only is the tax structure lower, but the Philippines? casinos generally derive more than half their revenue from slots and other mass-market types of games, meaning that most of their players are locals and therefore likely to return more frequently than players from abroad. Macau casinos, on the other hand, earn nearly 70 per cent of their revenue from VIP players, mostly foreign. For those players, casinos pay a commission to junket operators who bring them in, impacting margins on that business.
Macau?s growth over the past decade has been phenomenal, but with gross gaming revenue at roughly $38bn in 2012, for a 30 per cent ten-year compound annual growth rate (CAGR), that market is now more mature. Fifteen large-scale properties already operate, and another four or five are in planning/development stages.
However, we believe the story in Manila has really just begun.
In general, with improving economic prospects, evolving consumption trends and a burgeoning thirst for travel across the region, the gaming sector remains uniquely positioned at the intersection of many attractive themes in the Philippines and across Asia. As a result, we believe the new gaming developments merit a similar target enterprise value to Ebitda multiple when deriving valuation assumptions. Macau currently trades at 10.3 times 2014 EV/Ebitda, vs our target multiple of 11-12 times. It is too early to calculate equivalent valuation for Bloomberry, but we target a 13.6 EV/Ebitda by 2014.
As Philippine properties begin to generate real earnings over the next few years, we believe investors will be rewarded for their patience.
Michael Beer is Asia gaming analyst at Citigroup
Related reading:
Manila steps up to Asia?s gaming table, FT
Manila to probe casino bribery allegations, FT
From cheap shoes to giant malls, in Manila and beyond, beyondbrics
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