Philippine Dream

In Asia, the Philippines are second only to Macau for total gaming venues. The signs point to continuing growth, if the market remains stable.

Land-based casino gaming in the Philippines was legalized in 1976 by then President Ferdinand Marcos with the creation of the Philippine Amusement and Gaming Corporation (PAGCOR), a government-owned and controlled entity and the de facto gaming regulator in the country.

The regulatory agency was formed to intervene in the proliferation of unlicensed casinos and underground bookmaking operations that conducted games of chance in a rampant manner. Since the establishment of PAGCOR, the industry has grown steadily, and has successfully secured its position among the top three gaming markets in Asia.

 

Overview of the Market

There are four jurisdictions in the Philippines:

  1. PAGCOR for land-based casino gaming and its relatively new Philippine Offshore Gaming Operator (POGO, established in late 2016) for online gaming;
  2. the Philippine Charity Sweepstakes Office (PCSO) primarily administering lotteries;
  3. the Cagayan Special Economic Zone (CEZA) that regulates gaming in the Cagayan Valley region; and,
  4. the Aurora Special Economic Zone and Freeport Authority (APECO) for gaming activities in its region.

Except PCSO, all jurisdictions are authorized to regulate and operate casino gaming, as well as grant licenses to other entities.

So far, PAGCOR has been the most prolific, with a large number of casinos of its own and the responsibility for regulating other properties it granted licenses to—for example, the large-scale integrated resorts (IRs) within Entertainment City in Metro Manila.

In land-based casino gaming, PAGCOR’s contribution to the overall casino count in the Philippines makes the country second only to Macau for the total number of gaming venues in Asia. Its properties are also known by the commercial brand name Casino Filipino.

Casino Filipino operates gaming venues in six locations across the Philippines and has another 33 so-called “satellite” sites across the country. As of the end of 2018, the Casino Filipino chain offered a total of 472 live gaming tables and nearly 9,600 electronic gaming machines.

The Entertainment City district in Parañaque, National Capital Region or Metro Manila, is truly remarkable—the pride and joy of the country in terms of gaming and leisure activities. In 2008, PAGCOR awarded four provisional licenses for IR developments on a 100-hectare (247-acre) plot on Manila Bay, now known as Entertainment City.

Opened in 2013, Bloomberry Resorts Corp.’s Solaire Resort & Casino was the first IR in the zone. The property was designed by Las Vegas-based Steelman Partners to host world-class entertainment and leisure amenities. It was followed by City of Dreams Manila in late 2014, another prominent set of lodging, gaming and leisure products. In late 2016, Okada Manila opened its large-scale gaming and leisure complex with a wide range of facilities.

The fourth licensee, Resorts World Westside City (formerly known as Resorts World Bayshore), now under development, will bring one more set of renowned brands to the zone in the near future. This latest Resorts World property will follow in the footsteps of Resorts World Manila next to the Ninoy Aquino International Airport, arguably the Philippines’ first integrated casino resort, introduced in 2009.

There are other notable areas in the scope of casino gaming. The Clark Freeport Zone, a redevelopment of the former U.S. air base about 40 miles north of Metro Manila, is home to multiple casinos, including Royce Casino, Midori Casino, and Widus Hotel & Casino. Thunderbird Resorts & Casinos operates both Thunderbird Poro Point, the only five-star hotel resort in Northern Luzon, and Thunderbird Rizal, located east of Metro Manila and near Laguna Lake.

 

Growth Momentum and Main Drivers

According to the latest data published by PAGCOR, the Philippines’ land-based casino gaming market finished 2018 with an impressive growth rate from the prior year. The total gross gaming revenue generated by the land-based casinos in 2018 was PHP187.54 billion (approximately US$3.57 billion), representing a 22.9% year-over-year increase and a compound annual growth rate north of 20% for the period of 2015-2018.

Whereas GGR of the PAGCOR-operated casinos had a fairly modest growth rate of 4.4% to reach $683.7 million in 2018, the casino resorts in Entertainment City largely drove this growth—Solaire Resort & Casino, City of Dreams Manila, Okada Manila and Resorts World Manila aggregately accomplished a total GGR of more than $2.69 billion, an increase of 29.3% over the prior year.

In addition, the properties in the Clark Freeport and Special Economic Zone also experienced a 22.4% growth to reach an aggregate GGR of $164.2 million, leading the growth momentum outside Manila.

What is fueling the rapid growth?

“Cluster Effect”

Entertainment City, along with Las Vegas and Macau, arguably represent the world’s top casino clusters. While these destinations have varying degrees of dependency on gambling—with Las Vegas perhaps representing the most diversified—the presence of casinos has undoubtedly shaped all three into top tourist destinations.

In most industries, demand is the driver of supply. In the case of destination tourism markets, however, the lack of critical mass can often hinder growth and limit demand. Given this critical mass concept, The Innovation Group has found that the addition of gaming supply in destination-type markets results in a “cluster effect,” more formally known as agglomeration. As casino developments “cluster” in these destination markets, a corresponding increase in gaming and tourism demand occurs.

Entertainment City gained cluster status with the introduction of Resorts World Manila and Solaire, which helped to increase both gaming revenue and tourism considerably.

The opening of Resorts World Manila in 2010 attracted new international customers to the region. This resulted in the Philippine gaming revenue growth significantly outpacing position count growth. For example, between 2009 and 2010, gaming revenue increased 30% while total gaming positions increased by only 10%. This trend is reflected in historical growths as well, and continued with the introduction of Solaire in 2013. Since 2004, the total position count has grown by just 7.1% per year, while revenue has seen growth rates surpassing 17.2% per year and tourism growth of roughly 8.3% annually.

Supply of New IRs

The robust growth of gaming in Entertainment City, as well as in the Philippines in general, has been consistently fueled by sustainable supply of new IRs.

Okada Manila opened its initial phase in late 2016 with the casino launching operations in early 2017. Despite some noise at the corporate level, the property seems to have been ramping up well, reaching an annual GGR of $522 million in 2018. More recent results from January and February this year suggest that new records continue to be made and that performance is certainly heading in the right direction. The company has announced a new alliance with a major Chinese travel agency to draw more mainland Chinese visitors, boding well for further development of visitation to the property and driving a sustainable trajectory of growth.

Although Resorts World Westside City is taking a little longer than planned to open, the building work is expected to begin during the first half of 2019 with completion sometime in 2020, according to the developer. The property will be part of a “leisure and entertainment township” within Entertainment City, including housing units, an up-market shopping mall and a grand opera house among other facilities, to ensure adequate supply of premium offerings for the rapidly growing market.

Farther down the development pipeline, there are more prospective IRs coming to the Philippine market. Construction work for the second Bloomberry Resorts property, named Solaire Resort & Casino Quezon, is expected to start this year. The site is located in the Quezon City Central Business District in the Vertis North area of Quezon City.

The development will carry the same Solaire branding, but is strategically positioned to serve the mass gaming market in the north of Metro Manila. In February 2019, two of Bloomberry Resorts Corp.’s subsidiaries signed an agreement for a 10-year loan worth $762 million to partially finance the design, construction and development of this IR.

Another Philippine Stock Exchange-listed firm, PH Resorts Group Holdings, formerly known as Philippine H2O Ventures Corp, is also in a proactive development process for two IRs—the Emerald Resort on Mactan Island in the central Philippine province of Cebu and the Clark Resort at Clark Global City in the Clark Freeport Zone in Pampanga. The estimated completion date for these development schemes is reportedly circa 2022.

 

The Philippine Market’s Competitive Advantages

  1. Gaming Tax Regime

Gaming tax rates and structure can have a significant impact on the potential success of an IR development and the acceptable return on private investment. Implementing a tax structure that attracts optimal capital investment while still deriving adequate revenue through taxes and providing ample funding for tourism promotion, regulatory oversight and other associated social needs is critical. The chart above illustrates the effective gaming tax rates of major gaming markets in the Asia Pacific region.

As illustrated in the chart above, the Philippines’ gaming tax regime remains commercially competitive in the Asia Pacific region, which represents a solid competitive advantage of the market, as operators can allocate more financial resources toward customer acquisition and/or capital improvements that result in greater prospective revenues.

  1. Workforce and Labor Costs

The Philippines possesses a competitive workforce for the gaming industry. The local workforce tends to be comprised of fast learners who have the passion to work in most entertainment and hospitality settings. Additionally, English is one of the official languages, and is used as the primary medium of instruction in the country’s education system, making training and development sessions more effective.

Meanwhile, labor costs in the Philippines remain among the most competitive in the ASEAN countries. According to Willis Towers Watson’s Global 50 Remuneration Planning Report, the Philippine labor cost is very competitive compared to its neighbors, which works to its advantage in terms of attracting foreign investments and setting up new operations in the country.

Even for professionals and those at middle management levels, the average base salaries in Vietnam and the Philippines are among the lowest across the ASEAN region, contributing to competitive operating margins and investment returns.

  1. Improving Infrastructure

Given the massive domestic market, attractive investment factors, and the tourism-driving beauty of its natural environment, the country has the potential to be even more prosperous with improved infrastructure.

It is timely and appropriate that President Duterte established “Ambisyon Natin 2040” and embarked on a “Build, Build, Build” program to improve infrastructure in the Philippines. With the aid of Official Development Assistance (ODA) offered by countries such as Japan, Korea and China, the Philippines is now opening the “Golden Age of Infrastructure” by planning 75 flagship projects with $160 billion in investments. It aims to complete 32 of them by 2022, effectively empowering further growth of many industries, including gaming.

For example, the 106-kilometer Manila-Clark Railway Project, which aims to cut travel time between the two cities from more than two hours to just 50 minutes, is anticipated to be a strong catalyst in boosting tourism growth in the Clark Zone and benefiting the Clark-based casino properties. The project is expected to be completed by 2021.

 

Potential Concerns

Concerns regarding the growth and stability of the Philippine gaming market are based on political risks and the geopolitics between key feeder markets/countries.

It is important to note that for the IR industry, the political risks imply 1) political viability to pass legislation of casino gaming, and 2) political volatility where the political winds may change dramatically and thus impact the IR’s ability to do business.

Taiwan and most states in India are illustrative examples of low political viability for gaming development. Some smaller jurisdictions in the region, such as Laos, Myanmar and even Vietnam to some degree, represent the case of high political volatility that could jeopardize the IR market and suffocate potential growth. In the case of the Philippines, the stranded IR development plan in Boracay, proposed by Macau’s Galaxy Entertainment Group in partnership with local firm Leisure and Resorts World Corp., represents another example of political volatility.

For today’s large-scale international IRs, another factor that has become increasingly important when evaluating a prospective jurisdiction is the key feeder markets and the associated geopolitics.

Geopolitical instability will affect global business with decidedly negative implications for performance. For example, the Chinese authority’s ban on tour groups to South Korea, in response to South Korea’s installation of a missile system, cost the country an estimated $5.2 billion in tourism-related revenues, including casino gaming revenue.

Although casinos in South Korea shifted their focus to attract visitors from other countries in the surrounding area to mitigate the impact, they have struggled with the recovery of gaming revenues. Additionally, international tourism can be subjective to macroeconomic conditions and political climate in feeder nations that the IR host country may not be able to affect or improve.

 

Sustainable Growth in the Future

The Philippine gaming market’s major business drivers and the competitive advantages will continue to have profound influences on its long-term outcome, which will empower the industry to keep growing in a sustainable manner, capitalizing on the booming and increasingly wealthy middle class in the region, and better stimulating tourism and related economic impacts that benefit the country.

We believe these impacts and implications will continue to strengthen the industry in the Philippines, in the Asia Pacific region, and on a global basis.

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