South Korea plans to expand domestic gaming and build several integrated resorts in a major shake-up of its casino market
South Korea is finally going to open up its casino market—to domestic players and possibly to big resort investors—Inside Asian Gaming has been told. Depending on the number of domestic casino licences and IR licenses issued, the move could significantly expand the size of the South Korea market, and do so quickly.
Choung Byoung-gug, South Korea’s Minister of Culture, Sports, and Tourism, told a breakfast meeting of the Korea Chamber of Commerce & Industry in late June that casinos should be open to Korean nationals.
“I will look for ways to allow locals to enter casinos. I’m not sure if I will be able to accomplish this during my term, but I will push ahead with the project,” said Mr Choung in comments also reported by the Chosun Ilbo newspaper.
The country’s government would also like to build between two and five multi-million dollar integrated gaming resorts (IRs) of internationally-competitive standard in the country. These are likely to be aimed at foreign tourists. IAG’s sources say the government is mulling whether to allow domestic gaming in Incheon, a city to the southwest of the capital Seoul, to jumpstart the stalled Incheon City economic development project.
It is not clear at this stage whether any IRs in other locations would also be open to domestic players, or what the precise timescale of development for the IRs would be. A date of 2015 has been mentioned as an important milestone.
“The year 2015 is the time at which the right of Kangwon Land [casino] to accept Korean domestic customers expires,” says a source familiar with the issue.
Jeffrey Jones, Chairman of Korea Tourism Organization’s (KTO) Advisory Board, hinted at market expansion via the IR route during a discussion panel at G2E Asia last month. KTO’s remit is to work with investors and overseas governments to promote the commercial development of the South Korean tourism market. That includes setting targets for inbound tourism. In coming years, it would like significantly to exceed its 2010 target of 8.3 million inbound visitors. Casino resorts are seen as an important tool in achieving that. IAG has been given some background from several sources on how that might be achieved.
The foreigners-only casinos currently in South Korea—eight on Jeju Island off the south coast; three in Seoul; two in Busan, and one each in Incheon, Daegu and Sokcho—are mainly aimed at the junket trade rather than at mass tourists. Several major casino operators—including some with ties to Macau—are said to have had talks with the South Korean authorities in the past few months about the possibility of being involved in Korean IRs.
That’s the good news. The not-so-goodnews is that South Korea may only allow limited foreign investment into the revamped gaming market.
The main points made to IAG by industry sources were as follows:
- The IRs would probably be financed by domestic capital rather than foreign capital. Many of South Korea’s industrial conglomerates—known as chaebols—that have driven the country’s rapid economic growth, are cash rich. They are looking for new opportunities for capital growth in a market where—like Japan—interest paid on capital deposits was low even before the financial crisis of 2008.
- Foreign investment assistance may be limited to management and perhaps branding contracts for the IRs. Only foreign operators are seen as having the level of experience and understanding needed to run a large and complex casino and tourism resort.
- The selection process for any IR management partner may not be via open tender (as happened in Singapore). It is more likely to come via a shortlist drawn up by government officials after private consultations with the industry.
“The Koreans are not for the most part looking for foreign capital investment. They are looking for foreign tourists,” says one source spoken to by IAG.
There is one exception to the Korean sniffiness about foreign capital, say several sources.
“The Incheon City project—also known locally as the Lippoland project—hasn’t so far been able to find Korean investment. But foreigners don’t want to invest there unless there’s a foreseeable return, and that means local gaming,” says Ben Lee, Managing Partner of IGamiX Management & Consulting, who was willing to go on the record for this story. Mr Lee has previously been a marketing consultant for the Seven Luck Casinos operated by Grand Korea Leisure, a state-run company that had a partial privatisation in November 2009 when 30% of the company was floated on the Seoul stock exchange.
The original Incheon City project first emerged in 2005 as Woonbrook Leisure Complex. It included in the plans an integrated gaming resort component with a notional capex of US$1.12 billion, the working title of ‘Poseidon Resort’, and a provisional opening date of 2013.
LIPPO Incheon Development Co (a joint venture between Hong Kong-based construction company LIPPO Group and Incheon Urban Development Corporation) was named at that time as a 5% equity partner in the general Incheon City project, hence the nickname ‘Lippoland’. But the global financial crisis of 2008 appeared to drown any hopes of Poseidon Resort getting the necessary finance.
It seems unlikely that the original design concept or the original capex would be adhered to if an Incheon City IR were to be built. Capital and equity markets are not as bullish as they once were regarding rates of capital return on Asian casino projects outside Macau. Incheon already has one casino—though it would hardly be serious competition for an IR. The Golden Gate, run by Paradise Group at the Hyatt Regency hotel, is only a few minutes’ drive from Seoul Incheon airport, but it’s tiny—25 tables and 50 slot machines.
Overplayed
Fears that foreign investors would be frozen out of involvement in the rest of South Korea’s potential IRs may be overstating the case slightly. Even the notoriously inwardlooking North Korea has had some foreign gaming investment. Dr Stanley Ho—famous for his ability to charm the ideological pants off the most puritanical politician—managed to set up that country’s only casino in the basement of a Pyongyang hotel.
But the industry source believes that—paradoxically—free market South Korea will find it easier to stick to its guns on limiting foreign investment in casinos.
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“The chaebols in Korea [large corporations such as Lotte, Samsung and Hyundai] have access to a lot of capital. Companies of that calibre would probably be able to fund IRs without the need for foreign capital. Foreign involvement might be limited to managing the IRs—on the basis foreign companies have the experience and ability to manage them.
“You may find there will be joint ventures of some sort. If foreign investors do become involved, it may be by government invitation after private talks, rather than via public tender in the manner of Singapore,” said an insider.
“I think they’re looking at two or three spots as possible locations for IRs—Incheon City definitely and perhaps Jeju Island,” adds Ben Lee.
“There have been several indicators prior to the recent statement by the Minister of Culture that Korea might open the debate on allowing local gaming in the IRs,” says Mr Lee.
“Kangwon Land’s management appear to be aware of the proposed attitudinal shift. They have been quietly accumulating a war chest to diversify by investing outside the country as they prepare to meet this inevitable liberalisation. Given that their charter is to reinvest all profits back into Gangwon-do province, they obviously feel that the government will compensate them by letting them develop other streams of gaming revenue. The extension to their casino building granted by the government is really another sop to help cushion them from the pending shock.”
Mr Lee says Jeju might also be a viable option for one or more IRs. There had been rumours—even before news of the gaming reform plan—of several major new leisure and gaming projects for Jeju. One of the incumbent casino operators from Seoul is also considering opening a new casino there.
Whether foreign operators and investors will show such enthusiasm for the Korean casino shakeup plans if they are only offered management contract opportunities isn’t clear at this stage. Steve Wynn, for one, has gone on record saying he’s only interested in markets where he can build and manage a property. Other foreign operators such as Caesars Entertainment are known to have long coveted investment exposure to a large Asian IR project. But IAG understands that although Caesars’ senior management is aware of the possible IR schemes in South Korea, the company has not so far publicly indicated any interest in taking part.
It might not be such a bad thing for foreign operators and their investors to avoid involvement in casino resort infrastructure in South Korea. It might be less risky to focus instead on casino management. South Korea’s runty twin, North Korea, is dangerously unstable and nuclear-armed. Even if North Korea collapses gently like a flan in a cupboard rather than going with a bang like one of celebrity chef Heston Blumenthal’s exploding puddings, it’s still likely to cause some turmoil for the South Korean economy. Think ‘Fall of the Berlin Wall’ times one hundred, and with halfstarved refugees.
Foreign investor caution may be reinforced by the fact the South Korean government would apparently prefer to build at least one and possibly two IRs in Incheon City, approximately 16 miles southwest of the capital Seoul. This makes sense in terms of international flight connections, but not much sense in other ways.
First the positive aspects: Seoul Incheon International Airport is only one hour’s flying time from Beijing, one hour from Shanghai and one and a half hours from Tokyo Narita. It is not only the eighth busiest airport in the world measured by international passengers—with nearly 22 million in 2010—but also one of the most popular with travellers. For the past three years it has been voted among the top three airports in the world in a passenger survey compiled by Skytrax for the World Airport Awards—and took top spot in 2009.
Now for the downside: Seoul and Incheon are both in the far northwest of the country, fewer than 40 miles from the DMZ—the Demilitarized Zone that marks the border with North Korea. If the Hermit Kingdom decided to lob some ballistic missiles over the border, it would put a crimp in anybody’s casino holiday. This is not purely hyperbole. In mid-June, jumpy South Korean troops fired small arms rounds at an Asiana commercial airliner approaching Seoul Incheon, thinking it was a hostile North Korean military plane. It later emerged they were acting on orders that gave them permission to engage without reference to senior officers. Those orders were issued following the North’s artillery bombardment of the South Korean Island of Yeonpyeong in November 2010, in which four people died and 19 were injured. To give a sense of South Korea’s constant state of alert over its loopy neighbour, on the front page of the KTO website is an announcement warning visitors about a scheduled civil defence drill. It’s not exactly the kind of enticement that would appeal to the average Western holidaymaker.
“The government wants gaming investors to go to Incheon City, but so far there have been no firm expressions of interest,” says an industry source.
The Home Front
Kangwon Land to lose its domestic exclusivity
IAG understands that Kangwon Land—currently the only casino serving domestic customers—has already been told by the government that it will lose its exclusivity rights. That could happen even before the scheduled expiry of those rights in 2015.
“The year 2015 is the time at which the right of Kangwon Land to accept Korean domestic customers expires,” says a source familiar with the negotiations.
“Technically speaking, Kangwon Land doesn’t currently have exclusive rights in that regard. But the government has in effect said ‘You are the only one that can accept domestic customers’. There’s nothing, however, to stop the government issuing another domestic licence before then. Other provinces have been pushing to host domestic casino customers,” adds the source.
Kangwon Land generated KRW 1.314 trillion (US$1.25 billion) in gross sales in 2010, according to the company’s annual report. CLSA Asia-Pacific Markets said in its Korean Tourism Sector Outlook report in February this year that it expected the total size of the South Korean casino market—including the 16 foreigners-only casinos—to be US$1.9 billion during 2011. Kangwon Land is likely to account for at least 65% of that, assuming growth in the domestic and foreigners-only markets in 2011 is proportionate to that seen in previous years.
Given the popularity of Kangwon Land with domestic players, it’s likely that were other domestic licences to be issued, it would lead to a net expansion of gross revenues in the South Korean casino market. How much the market will expand is likely to depend on where the domestic licences are granted. A domestic licence in Incheon, only 16 miles from Seoul, for example, is likely to result in significant cannibalization of Kangwon Land’s business. Kangwon Land is 125 miles and four hours’ drive from Seoul along a difficult road. Kangwon Land is also in an economically underdeveloped area, meaning it has no affluent hinterland of players on which it can rely.
“I understand that Kangwon Land are currently compiling a list of other investment opportunities around Asia that they can go and look at,” explains the source.
“Bear in mind Kangwon Land’s charter was always to make money to develop the province [Gangwon-do]. It was never about private business getting special treatment. The idea of having a casino was to put money back into the province. They know that if they lose their exclusive right to serve Korean domestic players, their business is going to suffer. People won’t want to drive for several hours from Seoul on a difficult road to get to a casino if they have an easier alternative nearby.”
The South Korean government may have a pragmatic reason for opening up the domestic market. This is that the ban on domestic players is already being widely dodged. The country’s Chosun Ilbo newspaper reported in May that increasing numbers of South Koreans were gambling in foreigner-only casinos—often by obtaining foreign residency permits from corrupt officials of developing countries.
The newspaper said Seoul Metropolitan Police Agency recently arrested 16 people on charges of illegal gambling on residency passports obtained by forging Ecuadorean residence permits and 29 others for issuing the fake documents. “Certain South American and Southeast Asian countries consider the issuance of residence permits a source of tax revenue, so simply spending five days to a month in those countries is all it takes to get a residence permit through a broker,” said a police spokesman quoted by the paper.
According to South Korea’s Foreign Ministry, the number of Koreans with foreign residence permits and residency passports rose by around 6% from 95,824 in 2006 to 101,300 in 2010.
Postcards from the Edge
South Korea already has a mini-Macau; it’s just not very successful—so far
The South Korean government is also looking at another possible location for IRs. It’s well away from the hotspot of the DMZ and off the southern coast of the Korean peninsula. Jeju Island already has eight foreigners-only casinos, but they’re mainly boutique affairs. When the current inventory of Jeju’s casinos is combined, it amounts to around 197 slot machines and 178 tables. Kangwon Land on its own has 960 slots and 132 tables.
“The economy on Jeju is dying,” says an industry source.
“There also used to be a lot of Taiwanese visiting because Jeju—like Macau—used to be a transit point for Taiwanese travelling to mainland China. That was in the days when they couldn’t fly direct. Sometimes they would stay a night or two in Jeju. Now with direct flights [available since 2008], there’s no need.
“The Japanese used to go there because it’s close by. But Jeju didn’t improve its tourism product, and so the Japanese got bored and stopped coming,” adds the source.
“Jeju is also a special semi-autonomous zone, so it’s visa-free for Chinese visitors—unlike the rest of Korea.
“There was a plan to build an internationally branded theme park on Jeju. I’ve heard there may be fresh moves to get it going. That would be part of an overall plan to revitalise Jeju as a tourism destination.”
As IAG reported in our November 2010 edition, Jeju has also been touted as a possible destination for the extension of domestic gaming. The thinking seems to be that like Kangwon Land, it’s far enough away from main population centres to create disincentives for problem gamblers.
