The Next Frontier

NagaCorp follows Lawrence Ho in pursuing the development of an integrated resort in Russia’s Far East

Cambodia casino operator NagaCorp announced on 9th September it had agreed to invest US$350 million to develop a casino resort near the Russian port city of Vladivostok.

The resort will be part of the Primorye casino zone, one of four such zones designated by the Russian government in 2009 in conjunction with the exiling of the industry from major cities such as Moscow and St. Petersburg, where it was flourishing virtually unregulated and only lightly taxed. The other zones, all relatively remote, are Kaliningrad in Eastern Europe, the Altai region in Central Asia and in the lower Don River region near the Black Sea.

Just days before the NagaCorp announcement, Lawrence Ho, co-chairman of Macau’s Melco Crown Entertainment, had signed a deal with Primorye authorities to invest US$700 million through a Hong Konglisted vehicle, Summit Ascent Holdings, on an integrated resort of his own in the zone, scheduled for completion by 2017.

NagaCorp’s IR is expected to come online around 2018 and include 1,000 hotel rooms, 100 gaming tables, 500 EGMs, a 2,000-seat theater and various MICE and entertainment facilities. According to Union Gaming Research Macau, “The long-dated development timeline contemplates taking up to two years to obtain necessary permitting, while also accounting for certain contingencies (e.g. government investment in local infrastructure projects to improve access to the site) that could allow the company to walk away should certain targets not be met.”

The attraction of Primorye is its relative proximity to northeast China, the Koreas and Japan. Beijing is about two and a half hours from Vladivostok by air, Harbin less than two hours. Casinos are prohibited in both China and Japan. South Koreans are permitted to gamble in only one casino in their country.

UGRM stresses “there is no gaming company we can think of that has more ‘frontier market’ experience than Naga, which first entered Cambodia in 1995.” It believes the Primorye investment makes sense for the company for four other reasons:

1. Sufficient existing infrastructure exists to get customers from China, the Koreas and Japan to Vladivostok in a relatively easy manner, while government infrastructure commitments should improve access in future.

2. It seems probable that Vladivostok will be a limited license environment, (including the licenses of Naga and Lawrence Ho’s Summit Ascent). Furthermore, it is unlikely most other major Asian gaming operators would be interested in Vladivostok, since it “wouldn’t necessarily move the needle for them,” according to UGRM.

3. The gaming licensees are expected to face a friendly regulatory environment— namely an exceedingly low gaming tax and few restrictions on gaming, including the operation of junkets.

4. The expected opening date of around 2018 would give NagaCorp at least two years of operations at Naga2, which will have a heavier VIP focus than the existing NagaWorld facility. This bodes well for Naga in Vladivostok, where UGRM believes the market will have a significant VIP focus.

UGRM calculates that NagaCorp’s Vladivostok property would need to capture less than 1% of total regional VIP play to achieve a 25%+ return threshold. It adds, “Going forward our wish list would include an improvement in individual visas (or visa on arrival) for Chinese tourists, who today can obtain tour group visas relatively easily, more flights from the broader regional geography, and continued central government (Moscow) support.”