Cambodia gambles on development

By Muhammad Cohen

PHNOM PENH and MACAU - Since its casino resorts opened in 2010, Singapore has stood out as a shining example for global gaming companies. Everyone wants to imitate its success.

But few places can match Singapore as a destination for international tourism and investment. Rather than trying to copy the Lion City, many aspiring gaming centers would do well to consider the Naga alternative, based on the casino in Cambodia.

Singapore's example has been compelling. The country held an open tender for its two casino licenses starting in 2005, inspiring a fierce competition between most of the world's leading gaming companies.

The so-called Singapore model, spelled out in the bidding requirements, demanded iconic properties, non-gaming attractions and tourism appeal. That meant successful aspirants would have to spend billions of dollars on their new properties, which Singapore's well-paid bureaucrats dubbed integrated resorts (IRs).

As a result, Singapore wound up with two established international casino companies, Las Vegas Sands from the United States and Genting Group from Malaysia. They constructed the two most expensive casino properties yet built, with a total investment of more than US$10 billion.

Hot stuff
Marina Bay Sands has three 55-story hotel towers connected by a one-hectare rooftop deck that overhangs the east tower, creating a striking new vista in the Singapore skyline as well as a great vantage point to view the city. The resort also has a lotus-shaped museum, a million-square-foot convention center, and a glass-enclosed shopping mall.

Genting's Resorts World Sentosa features Southeast Asia's only Universal Studios theme park, and a multimedia, interactive, indoor/outdoor maritime museum soon to be linked to the world's largest aquarium. Both resorts have celebrity chef restaurants, destination spas, and tens of millions of dollars in artworks inside and out.

Combined casino revenue last year was estimated at more than US$6 billion, more than the total take of Las Vegas's casinos. They've become the most profitable properties for their companies, with combined profits on track to top US$2 billion this year.

Non-gaming revenue was $1.5 billion and EBITDA (earnings before interest, taxes, depreciation and amortization) reached US$500 million, "comparable to the top six hotel companies in the world", former Marina Bay Sands CEO Thomas Arasi noted at Global Gaming Expo (G2E) Asia 2012 in Macau.

As good as the casinos have been for Las Vegas Sands and Genting, they've been even better for Singapore. From 10 million visitor arrivals and S$10 billion (US$7.9 billion) tourist expenditures in 2008, arrivals rose to 13.1 million last year, with expenditures topping S$21 billion.

The city added close to 5,000 new hotel rooms that hospitality experts say were critically needed, yet seemingly defied the laws of supply and demand as rates rose 25%.

I'll have what she's having
Beyond numbers and dollars, the IRs have changed Singapore's image from stuffy and boring to exciting. They have in many ways given Singapore the "X factor" Prime Minister Lee Hsien Loong sought when he proposed casino legalization in 2004.

Seeing the impact of the two IRs, "Governments around the world will say, 'I want one of those'," Arasi observed.

But not every place has Singapore's special attributes. Its government and legal system inspire the confidence foreigners need to plunk down several billion dollars. Equally attractive, more than one in seven Singapore residents is a millionaire. Even before the IRs opened, Singapore was a leading international travel destination, supported by one of the world's best airports in terms of both facilities and travel links.

A country like Cambodia, especially the war-torn, capital-poor Cambodia of two decades ago, needs a different approach. NagaWorld, the only casino in Cambodia's capital of Phnom Penh, is a fraction of the size of Singapore's IRs. It was built in stages at a fraction of the cost, and is a fraction as profitable. But NagaWorld may be as beneficial to Cambodia as the IRs are to Singapore.

In 1991, just after a United Nations administered peace agreement gave hope of ending decades of political chaos and civil war, the government asked for bids to build an airport and related infrastructure in Sihanoukville, a port and beach resort on Cambodia's southern coast about 185 kilometers southwest of the capital.

NagaCorp founder and chief executive officer Chen Lip Keong, a Malaysian property developer who at the time had no experience in casinos, won the contract, which included the "carrot" of a gaming license, NagaWorld chairman Timothy McNally said.

"Cambodia was starting at ground zero," McNally, a former US Federal Bureau of Investigation agent who joined NagaCorp after working as director of security and legal services at the Hong Kong Jockey Club, said.

Rather than rounding out its tourist offerings, Cambodia was just trying to stop being the butt of the joke in Holiday in Cambodia, a 1980 punk anthem. It was a poor, war-weary nation struggling to get back on its feet, an unlikely site for casino development.

"When I used to go on road shows, they would look at us like, a casino in Cambodia? Still any M-16s on the streets? There were a lot of perception issues," McNally said.

In 1994, NagaCorp opened its first casino on a barge in the Mekong River. Two years later, the company saw its initial 20-year gaming license extended to 70 years. The license also gives NagaCorp exclusive rights to casino gambling within a 200-kilometer radius of Phnom Penh until 2036.

The casino moved on shore in 2004, and in 2006 NagaCorp raised US$95 million with a Hong Kong stock offering, the first Cambodian company to list internationally, helping to open the country to foreign investment.

By the end of this year, NagaWorld will total 1.4 million square feet, including 700 hotel rooms, a spa with Jacuzzi tub, sauna and steam bath in every treatment room, the country's top business meeting (and wedding) venue, and an epic breakfast buffet.

The company doubled net profit to US$92 million last year, and this year welcomed 490,000 visitors in the first quarter. "We brought pride to Cambodia, prestige, showed confidence in Cambodia, and raised the visibility of the country and the company. We were confident the story would become monumentally better, like the country," McNally said.

Ambitious expansion plans call for two more towers with over a 1,000 more hotel rooms and at least double the gaming capacity, plus Phnom Penh's first modern luxury mall. The US$369 million project, dubbed Naga2, includes a waterfront public park and a third tower that will be given to the government for offices.

The company's success to date and ambitious plans are reflected in its share price. The stock has doubled in the value in the past year, compared with a drop of around 9% in the benchmark Hang Seng Index.

Game theories
Those successes have tracked Cambodia's wider economic gains. Since 1999, Cambodia's gross domestic product has grown by more than 6% every year except for a flat 2009, reflecting the global financial crisis. Overseas visitor arrivals have increased from 460,000 in 2000 to 2.8 million last year and are on track to top 3 million this year.

"It has not happened by accident," McNally said. The government "has made a concerted effort with tourism. We've tried to tailor our offerings in line with what the government wants and needs". For example, NagaWorld's casino voluntarily excludes Cambodian citizens, except those who hold foreign passports.

One of Cambodia's great needs is well-paid jobs. NagaWorld has 3,600 employees, more than 90% of them Cambodians. The company provides skills and language training to employees across the board, as well as advancement opportunities. Many Cambodian employees have moved through the ranks to become managers.

Singapore needs more workers, not jobs. But below the surface, there are many similarities in the casino policies of Cambodia and Singapore.

One key motivation for both was to change their international reputations. To get what they wanted, both countries decided to give foreign investors a lot of what they demanded. Both allow full foreign ownership of casinos, lengthy lease and license terms, and low gaming taxes, compared with nearly 40% in Macau.

The Philippines has long had casinos, but now is trying to move to the next level as an international travel destination. The country has opted for a version of the Singapore model, demanding major upfront investment.

The Philippines also has its own perception issues that are closer to Cambodia's than Singapore's regarding its safety as both an investment and vacation destination. Like Singapore, the Philippines allows its citizens to gamble in casinos, but they're not nearly as high-rolling as wealthier Singaporeans.

The Philippines also has PAGCOR, the Philippine Amusement and Gaming Corporation, a government agency that both operates and regulates casinos. In other words, it's poised to compete with the new private casinos while also setting down the rules for the game.

The Philippines may have picked the right model, but PAGCOR's dual rule, different from anything in Singapore or Cambodia, could prove a deal breaker.