Manila Trip Report – An emerging Pacific Tiger? (Part 2)
Manila Trip Report – An emerging Pacific Tiger? (Part 2)
Casino operator bets big on continuing its winning streak in the country’s burgeoning gaming market
Initially planned around meeting a Chairman of an exciting listed company (to be covered separately), Altraman’s recent trip to Manila quickly morphed into a slew of meetings with other enterprises. His final stop was at Solaire Resort & Casino in Manila’s Entertainment City.
This piece concludes a two-part Series covering Altraman’s recent trip to Manila, sharing economic insights and highlights of meetings with three locally-listed companies. In Part 2 of this series, we provide some high level insights into the Philippines’ booming gaming industry and share highlights of Altraman’s investor meeting with the country’s largest local casino operator.
In the vibrant Philippine gaming industry, we found one casino operator particularly poised to capitalize on the growth story. With higher growth rates, less competition, and lower taxes than Macau, now may be an opportune moment for value investors looking to cash in on the gaming boom. With a strategic focus on expansion, the operator opened another casino this year in Quezon City, which looks set to be a major driver of group revenues over the few years should it follow a similar growth trajectory to the group’s flagship property in Entertainment City.
Bloomberry places its bets on the Philippines’ rapidly expanding gaming market
The Philippine gaming industry continues its meteoric rise, with gross gaming revenue (GGR) projected to grow at a 3-year CAGR of 17% from PHP 201 billion (USD 3.4 billion) in 2023 to PHP 320 billion (USD 5.44 billion) by 2026. One company has emerged as a dominant player in the market, namely Bloomberry Resorts Corporation (BLOOM.PS, “Bloomberry”; market cap of USD 1.89 billion). Founded in 2008, the Company has quickly established itself as the number one integrated resort and casino operator in the country, anchored by its flagship property, the acclaimed Solaire Resort & Casino (“Solaire”).
Solaire, which opened its doors in 2013, is the jewel in Bloomberry's crown. Situated within the bustling Entertainment City, Solaire is the largest integrated resort in the region, boasting an impressive array of gaming, hospitality, and dining offerings. The resort, which cost USD 1.2 billion to develop (ex-land acquisition), holds an impressive 270,000 sqm of floor area, featuring 457 gaming tables, 1,883 slot machines, 793 luxurious hotel rooms, and 15 dining outlets. Solaire's mass market gaming segment accounts for the majority of its revenue and profit, underscoring the Company's ability to cater to the country’s rising middle class and resilience in times of macroeconomic volatility (more on this later).
Entertainment City is home to several key integrated resort operators besides Bloomberry. These include Okada Manila (operated by Tiger Resort Leisure & Entertainment), City of Dreams (operated by Melco (MLCO.OQ), and Newport World Resorts (operated by Travellers International Hotel Group, a joint venture between Alliance Global Group (AGI.PS) and Genting Hong Kong (in liquidation)).
Bloomberry has consistently led the Philippines’ casino market, holding a 33-36% share of GGR. This is due to Solaire’s strong performance in both the fluctuating VIP segment and the stable mass gaming market.
In May 2024, Entertainment City resorts generated a GGR of PHP 13.4 billion (USD 230 million), down 8% year-on-year. Stronger VIP performance counterbalanced weaker mass gaming. Solaire’s GGR also softened this quarter, declining 8% quarter-on-quarter, primarily due to a softer VIP trend. Mass gaming at Solaire also slowed slightly, mirroring short term industry trends. This resulted in a 3% market share loss for Solaire, bringing its GGR share to 33% for Q224 QTD. Meanwhile, Newport World Resorts gained significantly in VIP market share, mainly at Okada Manila’s expense, with Solaire and City of Dreams also contributing.
GGR market share can be significantly impacted by the VIP segment, which is highly sensitive to macroeconomic factors. Operators must balance between VIP and mass market offerings, and in a downturn those with more VIP exposure must adapt quickly to maintain competitiveness. Solaire’s mass gaming operations give it a competitive edge, as it consistently holds 36-44% of this market. Despite short-term impacts from VIP volatility, Solaire’s balanced business model and operational execution have allowed it to remain the leading integrated resort in the Philippines.
Rolling chip – a special casino chip used by VIPs, tracked separately from regular chips.
Mass drop – the total amount wagered by mass market bettors in an establishment.
Coin-in – the total amount wagered by players on slot machines and gaming devices.
Hold rate – percentage of bet that the casino expects to retain over the long run, representing house edge.
Solaire’s mass gaming segment now makes up 67% of its gaming revenue, up from 57% pre-pandemic. Solaire’s VIP tables have a utilization rate of around 75%. Despite a decrease in VIP volume, the Company’s focus on premium mass customers, has compensated for the drop and now contributes 30% of Bloomberry’s revenue. Bloomberry’s mass table hold rate of 41% is also higher than its historical average of 37%.
Over the past three years, Bloomberry has reduced its reliance on overseas tourism, with Chinese (VIP) customers previously driving growth. While there has been a notable recovery in international arrivals to the Philippines since 2023, the levels are still far from the pre-COVID highs. Any further increase in international visitor traffic to the Philippines will only serve as additional upside growth potential for Bloomberry.
Looming barriers to entry as regulation favors dominant incumbents
The Philippine gaming industry, regulated by the Philippine Amusement and Gaming Corporation (PAGCOR), has significant entry barriers, including a required investment of at least USD 1 billion for a Casino Gaming License. These licenses, valid for 25 years and renewable for another 25, allow operators to hold up to two properties for casino development. Bloomberry has only just opened its second casino in Quezon City, whereas some competitors have long been at quota with two casinos in Entertainment City, thus limiting their growth runway. Newport and Okada are focused on ramping up operations in Entertainment City, while Melco is pausing further expansion in the Philippines as it focuses elsewhere.
In terms of tax and fee structure, the Philippine gaming industry faces a relatively favorable fiscal regime compared to other major gaming jurisdictions like Macau. Notably, there is no corporate income tax on gaming operations in the Philippines. In contrast, Macau operators face a 35% tax on total GGR, plus an additional 4-5% in other levies and fees, resulting in an effective tax rate of around 40%. The up-front taxes levied in the Philippines add up to an effective tax rate of 27% (with no corporate tax required).
PAGCOR is restructuring the Philippine gaming industry, including reducing the gaming tax rate for domestic online gaming providers from 42.5% to 35%, eliminating illegitimate offshore gaming licensees, and privatizing its 41 self-operated casinos. There are no immediate concerns about the Filipino government restricting local residents from gambling in casinos (like in Singapore or Cambodia), as it would contradict revenue objectives. Despite rumors of an entry levy on locals, experts believe it’s unlikely due to the potential to deter players.
Legal disputes now behind and costly overseas expansion plans on hold
Bloomberry had a decade-long legal dispute with Las Vegas-based Global Gaming Asset Management (GGAM), which previously managed Solaire. In 2019, an arbitration tribunal ordered Bloomberry to pay GGAM USD 296 million for unjust removal from Solaire’s management in 2013 and upheld GGAM’s 8.7% stake claim in Bloomberry. The settlement required Bloomberry subsidiary, Sureste Properties Inc. (SPI), to buy all Bloomberry shares held by GGAM for USD 300 million. As of 30 April 2024, SPI, owning 8% of Bloomberry’s shares post-settlement, is a 91% subsidiary of Bloomberry.
Bloomberry has various subsidiaries and investments, including in cruise passenger transport and private aircraft management (acting as a funnel to the casinos), but these are minor functions. Bloomberry fully owns Solaire Korea, where it invested USD 130 million but failed to secure a gaming license due to fierce competition and is now seeking to divest. It’s also dissolving its Japan subsidiary as its pursuit of an integrated resort opportunity there has not materialized.
Grand opening and ramp up of Solaire Resort North to serve as a near term catalyst, with other ambitious projects in the pipeline
In May 2024, Bloomberry opened Solaire Resort North (SRN) in the heart of Quezon City (a sprawling extension of Manila with a bigger population than the capital itself). The property features 4 casino floors with 163 tables and 2,669 slot machines, 526 hotel rooms (including 25 suites), 14 dining options, and a 1,800 sqm MICE space.
Management discussed the synergies and marketing plans for SRN, as well as Bloomberry's online gaming strategies. SRN’s opex is anticipated to be lower than Solaire due to cost synergies. The look and feel of SRN based on photos and reviews online appears more premium than the existing Solaire property. Unfortunately, I was flying out on the day so didn't get the chance to visit SRN, but early reviews have been very positive.
Bloomberry's successful scaling up of its flagship Solaire property in 2013-2014 is indicative of growth SRN might achieve. When Solaire first opened, it achieved EBITDA positive within the initial 3 months and became net profitable by the end of the first year in FY14A. In the subsequent years, Bloomberry (Solaire) experienced mid-to-high teens percentage growth in revenue, with the exception of FY15A where it saw a significant net loss due to factors like accelerated operating expenses, FX losses, and pre-opening costs. However, once fully scaled up, Solaire was able to sustain that growth trajectory.
SRN’s growth could potentially mirror Solaire’s initial scaling, aligning with management’s expectations and current sell-side estimates. Bloomberry’s growth this year is likely to be driven by SRN, while Solaire’s steady growth is projected based on Q124A trends.
For FY24e, SRN is expected to contribute PHP 8-10 billion (USD 136-170 million) in GGR, adding an extra PHP 1-2 billion (USD 17-34 million) in EBITDA to Bloomberry’s FY23A earnings of PHP 18.8 billion (USD 320 million). Should SRN continue on a similar growth trajectory as Solaire, it can contribute a PHP 10 billion (USD 170 million) EBITDA contribution annually in 3-4 years time. As the sole licensed casino operator in northern Manila, SRN is poised to quickly gain additional market share on top of Bloomberry’s stronghold in the Entertainment City, particularly in its first 2-3 years of operation.
In the long term, Bloomberry plans to invest in casino developments in Cebu (Emerald Bay Resort, although recent reporting of deal abortion) and Clark (The Base Resort), and acquire 280 hectares of land in Paniman, Luzon for PHP 7.5 billion (USD 134 million) for eventual use as a golf resort and high end casino for VIPs. While Bloomberry’s long-term expansion plans are promising, significant new gaming developments aren’t expected until the decade’s end.
Balancing the books to kickstart shareholder returns
Currently, the focus is on market consolidation and reducing leverage. Bloomberry has PHP 101 billion (USD 1.72 billion) in outstanding bank loans for its various expansion projects.
Bloomberry’s net debt for FY24e is projected to rise by PHP 5-6 billion (USD 85-102 million), totaling around PHP 105-106 billion (USD 1.79-1.81 billion). An additional PHP 20 billion (USD 340 million) was raised during the pandemic. To manage this debt, Bloomberry is actively refinancing PHP 40 billion (USD 681 million) of its loans, aiming for a conservative 3.1x net debt to EBITDA ratio.
Bloomberry is considering resuming dividend payments next year. The last dividends of PHP 25 cents p/share were paid in FY19A. The yield is expected to be 2-3% at current levels with the same payment. As financing improves and the financial position strengthens, Bloomberry plans to pay steady dividends.
Bloomberry led by veteran entrepreneur with strong track record
Enrique Razon, Bloomberry’s Chairman and major shareholder with a 68% stake, splits his time between overseeing the resort operator and his other ventures. His primary business, International Container Terminal Services, Inc. (ICTS.PS), a global port management company, has generated a 17% internal rate of return (IRR) since he took over in 1995. Razon also has a 51% stake in Manila Water, which supplies water to 7 million of the capital’s residents. Razon also serves as the utility provider’s President, Chairman, and CEO.
Razon’s diversified portfolio and hands-on approach have driven the growth of his ventures, including Bloomberry. He has also shown a willingness to learn lessons, shown by Bloomberry’s shift of focus to the domestic market after ventures in Korea and Japan encountered challenges. His experience in managing large-scale projects and his family’s ties in the Philippines provide strategic advantages in the gaming industry. The Razon family maintains a strong focus on professionalism and good corporate governance.
Summing up the Solaire sojourn and why we like this weighted coin
The highlight of my trip was certainly a private tour of Solaire. I was thoroughly impressed by their sophisticated set up, which include a comfortable, relaxed environment and a focus on the mass market rather than just VIP gamblers.
Their 33% market share in the Philippines by GGR, mostly from the mass segment, is a testament to their strategic approach. Bloomberry is positioning itself as the dominant player in the Philippine gaming market through strategic expansion and smart financial management. The Company's near-term catalyst is the ramp up of SRN, which will significantly expand its footprint.
After visiting competitors like City of Dreams, it’s clear that Solaire stands out. Unlike the claustrophobic feel of most Macau casinos, Solaire’s unique features, such as windows on the gaming floor, create a psychologically appealing environment for players. Its top-class service, game selection, and facilities contribute to a relaxed and comfortable atmosphere. These adjustments allow Solaire to offer a differentiated gaming experience and may be contributing to Blomberry’s growing market share.
We think Bloomberry offers good exposure to the Philippines’ rapidly growing gaming industry, which differs from the more mature and saturated Macau market. We see this both as a macro and fundamental opportunity as the Company leverages its first-mover advantage and strategic vision to solidify its dominant position.
Bloomberry currently trades at a roughly 32% and 11% discounts to local and Macau peer average, respectively (9.9x and 7.4x), on a blended 12-month forward P/E and EV/EBITDA basis. Our personal target range for the stock is PHP 13.96-14.85. We think that Bloomberry over the short-to-medium term should be able to narrow its valuation discount to Macau peers, especially as we see further recovery in the local gaming industry and SRN shows a similar growth trajectory to Solaire’s early days.
Full disclosure: Currently, both me @TheAltraman and @Desertfox have established a position in the stock.
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What were the minimum bet size for those mass tables?