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Russia – Tigre de Cristal reports a loss in its first full quarter

By - 29 March 2016

Tigre de Cristal, the first casino resort to open in the gaming zone of Primorsky Krai , close to the Russian Far East city of Vladivostok, has posted its first full quarter of results, generating a loss of HK$85.4m (US$11m) and EBIDTA of HKD14.3m (US$1.8m) for the quarter to December 31.

Having opened on October 8 with VIP gaming being launched later on November 11, the US$175m casino houses 25 mass gaming tables, 10 VIP tables and 321 gaming machines.

The VIP side of the business was steady with roll increasing from HK$258m in November to HK$382m in February. An average of nine tables were opened each day.

Summit Ascent, who owns 60 per cent of the project, said: “Our strategy is to start our rolling business using only casual junkets initially without fixed-room operators. This decision is deemed necessary in order to preserve the bargaining power of the casino vis-à-vis fixed room operators. It is our plan that fixed room junket operators will start to operate at Tigre de Cristal starting from May of 2016 when we have fully ramped up our own casual junket business.

“So far, our strategy appears to have been correct as rolling chip turnover has been increasing on a month-on-month basis since commencement of business and we expect to see marked improvements on this business over the next several months,” it added. “In addition, the existing casual junket business has given us the flexibility to add fixed room operators at a later date from a stronger negotiating position.”

In terms of mass table gaming, the casino peaked in December at a high of R448m. January’s mass total came in at R407m whilst February’s rose to R412m. Despite the inability to legally advertise casinos in all of its target feeder markets and the onset of the Russian winter, the ramp-up of the mass table business in the initial months was described as ‘satisfactory.’

The operator stated: “Mass table drop did not show a meaningful improvement in January and February of 2016. We believe this is due to a seasonal factor. Traditionally, organised tour groups from China normally operate during the warmer months in Vladivostok. As a result of the dwindling down of organised Chinese tour groups during the winter season, the number of non-Russian mass market players started to decrease between October 2015 and February 2016. This is evidenced by the fact that in February 2016, non-Russian patron visitation dropped to approximately 16 per cent. That said, thanks to the continuing ramp-up of our domestic Russian business, table drop has managed to hold up at reasonable levels. We expect mass table drop to increase substantially when organised tour groups from our target markets in Northeast Asia start to operate again in the warmer months.

“In addition, we expect the Russian mass business to also increase during the summer months as Vladivostok is a major domestic tourist destination for Russians during the summer period.”
On average, there were 612 registered players entering the casino daily of which approximately 50 per cent were non-Russian (predominantly Asians).

The slot market at Tigre de Cristal is primarily a local market. Slot handle has grown month-on-month since the opening peaking in February at R1,058m.

The operator explained: “We remain upbeat on the continuing ramp-up of our slots business over the rest of 2016. Management believes that there are several reasons that the business has significant room to continue its growth trajectory over the coming months and that full ramp-up should be achieved during the summer of 2016.”
The company said it needed to sign up with ‘casual junkets’ over the next quarter as well as one or two VIP fixed room operators and is hoping that any rebound in the Russian economy or currency will have a positive incremental impact.

Lawrence Ho, Chairman and Non-Executive Director of Summit Ascent, said: “The grand opening of the property was a major milestone in Summit Ascent’s history, and is a significant step forward in our maturation as a listed company. The management and operating team at G1 Entertainment LLC are working diligently to ramp up the business at Tigre de Cristal. We expect to be running at close to optimal levels on a ramped-up basis sometime during the summer of 2016. We are further encouraged by the month-on-month improvements seen thus far during the winter season. With the local government continuing to heavily promote Russian Far East as a tourist destination, the expressway between the Vladivostok International Airport and the IEZ nearing completion, key parts of the “free port” initiative being implemented and the opening of more non-gaming facilities at Tigre de Cristal, we only expect our visitation and gaming metrics to increase.”

According to Russian Government statistics, tourism to the Primorsky Krai increased by nearly 60 per cent, on a year–on-year basis with the largest portion of this growth coming in the fourth quarter of 2015.

Mr. Ho added: “We believe that our project has been a major driver to this impressive increase. Our business proposition has been further validated by the commitment from several operators to develop other integrated resorts in the IEZ. While we expect our monopoly position to remain intact until at least 2018, we do look forward to the positive effect these resorts, our own Phase II project, and other non-gaming developments in and near the IEZ will have on our business, the Primorsky Krai, and the attractiveness of the region as a tourist destination. In 2016, we will continue to ramp up our business at Tigre de Cristal, and expect to commence development of our Phase II project in the IEZ.”

Union Gaming Macau-based analyst Grant Govertsen said: “Mass market trends seem to confirm our thesis that the cold weather months would result in a customer base that is primarily local.”

However with the zone charging monthly fees of R125,000 (US$1,800) per table and R7,500 per machine, Union has calculated a tax rate on VIP of around 1.2 per cent.

Mr. Govertson said this left ‘plenty of meat on the bone even after paying a competitive commission rate.’

“We would not be surprised if commission rates were to creep higher with the introduction of fixed-room junket operators in order to be more competitive with other regional jurisdictions,” he added.

The Group has already commissioned conceptual drawings for its Phase II integrated project in the Primorsky Krai IEZ. This project is expected to have 500 total hotel rooms distributed across 2 hotels, gaming areas with 100 VIP tables, 70 mass market gaming tables, 500 slot machines, a nearby golf course and sports clubhouse, MICE (Meetings, Incentives, Conferences, and Events) facilities, a shopping mall, a nightclub and concert facility, children’s play areas and food and beverage offerings including Western, Chinese, Korean, Japanese, casual dining, and bars. Construction on Phase II is expected to commence in late 2016, and the resort is expected to open for operations in the latter half of 2018.

Another potentially positive factor will be the start of building work on two to three additional integrated resorts in 2016. Two groups have indicated that they will commence property development in the IEZ in 2016, while two others are expected to specify their plans in the very near future. All lots in the Primorsky Krai IEZ are already spoken for. As these projects are completed and their operations commence, we believe that these resorts and our own Phase II project will create a “cluster” effect in the Primorsky Krai IEZ, and further drive visitation flow to the region and our properties.

The operator added: “The construction of these integrated resorts further validates the viability of our first-mover investment. The master plan for the IEZ and immediately surrounding areas include a water park, amusement park, golf courses, a ski area, a yacht club and other non-gaming amenities that will enhance the Primorsky Krai IEZ’s attractiveness as a tourist destination.”

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