The Philippines’ burgeoning gaming industry may surpass Singapore’s $5.6-billion gaming market by 2018 on the back of favorable local demographics and a likely spillover of foreign high-rollers, foreign bank Credit Suisse said.
In a new equity research dated Feb. 27, Credit Suisse initiated coverage on the Philippine gaming sector with a rosy outlook of a 28-percent compounded annual growth rate (CAGR) for the industry over the 2012-2018 period. The bank’s outlook, however, was less aggressive compared to the state-owned Philippine Amusement and Gaming Corp.’s goal of attaining $10 billion in annual gaming revenues by 2017.
“We view the Philippines as having a potentially larger domestic market in the high-margin mass segment compared to other Asian gaming hubs on the back of favorable demographics,” the report said, noting that the Philippine population of 97 million was almost thrice that of Singapore, Malaysia and Macau combined.
Credit Suisse pointed out that the Philippines also had the fastest growing working-age population in emerging Asia, projected to grow by more than 2 percent annually over the next 10 years. Accelerating wage growth, signs of increased spending power and consumer confidence at near-record highs all pointed to favorable demand prospects, the research said.
It also noted that limited hotel capacity and the absence of new casinos elsewhere in the region until 2015 could result in a spillover of foreign VIPs (very important persons) into local shores.
Overall, the research sees a longer sustained growth for the Philippines compared to Singapore due to stronger junket participation and a protracted novelty effect.
“Note that the VIP market in Singapore is primarily in-house, heavily reliant on credit directly extended by the casino to VIP clients. We believe that this reliance on the in-house/direct VIP segment stems from the difficult operating environment for junkets in Singapore. As a result, Singapore casinos bear the brunt of the credit risk in running the VIP business, as opposed to sharing the risk with junket operators,” the research said.
“We believe that Philippine casinos will be able to draw stronger participation from junkets—and consequently provide a more stable supply of credit to VIP clients—as lower tax rates in the country will allow for higher commissions to be paid to junket operators. Moreover, based on our channel checks, the regulatory environment in the Philippines appears much more conducive to junket operations as compared to Singapore,” it said.
Given this gaming outlook, Credit Suisse initiated coverage on two listed gaming stocks, Bloomberry Resorts Corp. and Belle Corp., with “outperform” ratings and target prices of P17.50 and P6.50, respectively.
Credit Suisse projected a strong earnings CAGR of 38 percent for Bloomberry and 68 percent for Belle from 2013 through 2016, much like in the early years of Singapore casinos. The implied price-to-equity ratio for both stocks (2014 P/E multiple of 20x for Bloomberry and 30.8x for Belle) are below the 33.3x pre-operating P/E of Genting Singapore Plc, which the research said provided a better benchmark than more mature regional peers.
A P/E ratio of 20x means that investors are paying 20 times the amount of money they are expected to make for that year.
In the near- to medium-term, the research said the growth in Philippine gaming would be driven by the increase in capacity, with new casinos coming on stream through 2016. Bloomberry’s Solaire is expected to open by March this year while Belle Grande, a partnership between the SM group and Macau’s Melco Crown, is expected to open in the first half of 2014.
Credit Suisse said Bloomberry and Belle could start enjoying positive free cash flow by 2014 and attain a net cash position by 2015.
“We expect Philippine casinos to exhibit higher profitability than regional peers in non-Macau Asia on the back of a more favorable cost structure,” the report said. Although tax rates on gaming revenues are lower in Singapore than in the Philippines, the report noted that Singapore casinos are also taxed at the bottom-line whereas gaming profits of Philippine casinos are not, while Malaysia casinos are likewise taxed at the bottomline, on top of having a higher effective tax rate on gaming revenues compared to the Philippines.