A story about Asian gambling and how it came to Russia

Asia and gambling

Since I first sat foot in Asia and started to meet more local Asians, I have been fascinated by how deeply ingrained gambling is in their culture. Sure we have all sorts of gambling in Europe and the US too, but what surprised me the most was how large sums of money the Asians were willing to part with for gambling (compared to their income). Someone with a monthly spending power (after costs) of 10 000 HKD could discuss with me that having a budget around 7-8000 for gambling over a weekend. That for me was unheard of except by more professional players.

Rise and fall of Macau

I guess nobody have been able to avoid the headlines from the Macau gaming sector and the mind-boggling turn-over figures and profits the companies were churning out, a few years back. Companies like Sands and Galaxy were the stars and for a short while Stanley Ho, the owner of Galaxy was the richest man in Asia. Well the Chinese leaders thought it went too far, and in their drive to rein in corruption, bribery and money laundering, it was suddenly not OK for the wealthiest Chinese to be seen in Macau, spending obscene amounts of money. This fairly small group of rich people, who stopped gambling, toppled the whole industry. On top of that the mainland stock market went from roaring bull to free-fall at the same time. Shares of HK listed Casino companies fell 60-70% from their peak levels and it all went very fast. Many investors who didn’t understand the dynamics of the sector must have been caught pretty bad in these companies. I talked to some US investors who obviously did not understand this deeply and jumped in just a few months before the peak. This is the first lesson in Chinese Casino gambling, a small group of VIP clients, can drive more revenue, than the whole mass market. But as they say, easy come, easy go.

Junket operators

The second lesson is understanding how the VIP segment of Chinese high-rollers are attracted through junkets. This is fairly shady business, although some junket operators are even listed on a stock exchange. What they do is providing a middle man between Casinos and VIPs, providing different “value adding services” (yes, I know what you are thinking of), arranging flights, pick-ups etc. For the interested reader here is a longer description: Junkets Factbox. But the most important service of a junker for VIPs is credit while gambling and the possibility to gamble for large amounts, and then settle potential debts back home in RMB in China. This is essential since the conversion of RMB to foreign currency is not freely available to mainland Chinese. This is then also a way of getting money out of China and/or money laundering. Casino and junket operators will probably not end up in ESG funds if we put it like that.

Russian Casino

Obviously there are other countries that wants to gain from the Asian’s willingness to gamble. Among them two that I studied, Cambodia and Russia. I spent the better part of a day updating myself about Nagacorp (3918 HK). Nagacorp run a casino in Phnom Penh, Cambodia. This is a company I know well, owned for a few years and followed since 2011 and I’m still interested in. But I’m waiting for an attractive entry point, which I think is in the 4-4.5 HKD range. I save that discussion for another time. Reading about Nagacorp I started to look deeper at their upcoming casino project in Russia. This then led me to another company, Summit Ascent Holding (102 HK) who have just opened a new casino in small scale in Vladivostok Russia. I found project and plans of the Russians to open this casino area very interesting. In fact it is somewhat similar to how Macau Cotai strip got developed. Or as Bloomberg asks, is Vladivostok the next Vegas (hardly but anyway interesting comments in the video): Putin’s Making a Big Bet on Building Vegas in Vladivostok

For research purposes I found this “boring” video more interesting, showing the plans for the casino resort area.

Summit Ascent Holding (102 HK)

Newly opened, small casino in Vladivostok Russia, yes, we are climbing out far on the risk ladder with this one. I have decided to take a small position (2% of my fund NAV) on today’s close in Summit Ascent Holding (SAH from now on). This won’t be a full analysis, but I will quickly try to work through why I invested. I needed to write such a long intro above, because it all ties together. Let’s start with the share-price.

sah_perf

The stock was hyped a lot a few years back, because the company is started by the son of Stanley Ho (richest man in Asia for a short while), who runs Galaxy, perhaps the most famous of the Macau casino giants. This is what it sounded like back then: Hong Kong Billionaire Lawrence Ho’s Summit Ascent Boosts Stake In Russian Casino. Well as we know, things usually take longer than investors have patience and the stock price fell sharply. Especially when the operations were up and running, and revenue was not showing any sharp increase. That changed dramatically with the latest semi-annual report, when the stock jumped 40% within a week.

Targeting Chinese

Although located in Russia, the obvious customer targets are Chinese. Gambling is banned in China and therefor Macau’s success. But it is far to Macau from northern China – and hence we have Vladivostok in a much closer distance. This would also be the case for Japanese gamblers, although initially it is probably not the operators main targets. Also perhaps the city is able to offer another type of lifestyle more long term, compared to overcrowded Macau, as can be seen in the video about the area.

Quick revenue increase last two months

This table shows the VIP turnover and the revenue it generates, as you see a sharp increase for the last two months.

vip_sah_rolling

This revenue increase does not show in the semi-annual figures yet (since it ends in June), but is only visible to the one that actually reads the full report. Here is the explanation:

“Our rolling chip business, targeting the Asian VIP market, has seen phenomenal month-on-month growth, vindicating our investment thesis that the Primorsky Krai IEZ is an ideal location to capture the significantly underserved gaming demand in Northeast Asia. Our strategy has been to start our rolling chip business using only casual junkets initially without fixed-room operators. This strategy is deemed necessary in order to preserve the bargaining power of the casino vis-à-vis fixed-room operators. Thus far, our strategy has been proven to be correct. This is evidenced by the fact that rolling chip turnover has been increasing on a month-on-month basis since the commencement of business in November last year and dramatically increased following the start of two fixed-room operators in late June 2016”

Investment case

  • The stock has been hammered and although a breakthrough has been shown in the figures, the market has not yet hyped the stock as before. Calculating on just current run-rate as of August for the Casino business, we are looking at a company valued around P/E 15-20.
  • I actually believe in this resort area as a whole, as long as Putin stands behind it, and it becomes a VISA free region, low tax and everything that has been promised. Build it and they will come!
  • The Ho family surely have all the right junket contacts, to bring in and focus on VIP players makes a lot of sense. The mass market will come when it is a big resort area with other activities. Also since it’s still somewhat no-no for Chinese VIPs to gamble in Macua, maybe they feel more comfortable in a very private setting in Russia with other high-rollers. I think we can see further growth from the numbers in the table above
  • The company has another project phase in their plans, although we do not know the success of the whole resort area or any build outs, it has at least some optionality value.

Obviously very high risk. But in my view worth a 2% position, since this can easily double or triple within the next year(s).

 

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