Global Gaming and Casinos Industry Specialist, Casino Business Review LLC

Howard J Klein

Global Gaming and Casinos Industry Specialist

Thematic (Sector/Industry)

<ul>
<li>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/795/original/800px-Hainan_Island_topographical.jpg?1535326939" class="editor-image img-responsive" data-smartkarma-image-id="61795"></figure><div class="content-caption">Hainan's geography fits a standard tourist paradigm</div>

Recurrent reports of imminent development of horse racing, casinos or sports lotteries on Hainan distort realities.
</li>
<li>So-called "entertainment bars" presumably evoke baccarat format but winnings are prizes not cash. No threat to Macau.</li>
<li>Four key questions answered to help separate thin conjecture from probable fact.</li>
</ul>A former associate, now a realty development consultant was recently tasked by a client to reconnoiter several global tourist sites including China's Hainan Island. Prior to his departure we arranged for us to video conference and evaluate the gaming question of Hainan and meet again upon his return. In the phrase of government security apparatus, our objective was to arrive at a "threat assessment level" of the real, imagined or hyped up prospects of that island building toward becoming a major competitor to Macau integrated casino resorts. Over the past year and a half, I have studied 53 sector analysis and media reports which had alluded to the gaming possibilities of Hainan. My conclusion: Based on my own research and our recent discussions with on the ground sources we believe investors are ill-served by rumors of Beijing imminently planning to set up Hainan as a competitor for gaming dollars now flowing entirely to Macau.What follows are answers to four critical questions my associate and myself posed to knowledgeable sources in Hainan in an effort to get a better grasp on the best opinion and research we could generate on the issue--which as are all issues involving Beijing policies, elusive.Background<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/796/original/m18472.gif?1535327044" class="editor-image img-responsive" data-smartkarma-image-id="61796"></figure><div class="content-caption">Hainan sits across from, Guangdong, but no bridge</div>China has moved over the years to develop Hainan Island as a global free trade port and tourist mecca.(See detail below on Hainan basic stats). Most recently during an April visit, Xi Jinping strongly supported speeding up the growth of Hainan as a place that encourages business, offers a transparent legal system, vigorously protects intellectual property and, suggested that horse racing and sports lotteries could be part of that development paradigm. These remarks triggered a sudden rush of companies registering corporate names with the words "horse racing". The initiatives suggested were seen by many to be an effort to blunt the challenges posed by the Trump tariff disputes as well as an extension of Xi's OBOR project. Our focus on the realistic possibilities for gaming expansion there was compressed into four key questions we had for savvy Hainan locals in the business community.Question One: How real or imminent are the prospects of Hainan being set up as a competitive gaming jurisdiction to Macau beginning in the near to intermediate term?Answer: Tourism is central here. Last year, foreign tourist arrivals to Hainan reached one million. The largest contributing countries to that visitation were Russia, South Korea, and Japan. According to our research, those three nations citizens tend to have a higher than average proclivity for gaming. Hainan received over 20 million total visitors, with 18 million of those arriving at the prime destination resort city of Sanya. So adding this tourist base to the resident population of over 9 million it would seem on the face of it, that the province presents a highly tempting opportunity for the development of gaming.But reality tells an entirely different story. Three successive efforts to legalize, develop and construct race tracks on the island since 1993 have failed. There has been and we learn now, strong resistance to gaming by local government in general and high Communist Party officialdom specifically. We have compressed the consensus of our Hainan panel members into a quote from one major operator who we believe, summed up the sentiment of the group. Note: This quote is a translation:<blockquote>Local authorities are opposed to gaming. Not all, but most. It's a very tricky position since nobody is in the mood to buck the central government, But realistically, horse racing initiatives have a bad history here. There is no appetite for conflict but even if local officials did approve the initiative, we have serious doubts as to the success. There are so many bigger fish we have to fry. If I were holding shares in Macau stocks I would not be losing any sleep over Hainan.</blockquote>Sports lotteries, a form of wagering on the outcomes of games, likewise appears to be favored by the central government. Yet locals are unimpressed thus far. "Said another source, "When we discuss it there are some who favor it but mostly it evokes more yawns than excitement. Also it's an online thing. Just last week Beijing announced it was shutting down online poker because it no longer accepted the principle that it was a game of skill.As to full scope casinos, one member of our panel dismissed that as "no chance in the foreseeable future. Others mostly agreed. His take, "It makes no sense for Beijing. A huge industry has been built in Macau. Xi in my view wants Hainan, Macau and Hong Kong united as a fortress of free trade, but not by eating from each other's bowl of rice..."<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/061/797/original/Mgm-Grand-Sanya-photos-Exterior-Hotel-information.jpg?1535327147" class="editor-image img-responsive" data-smartkarma-image-id="61797"></figure><div class="content-caption">MGM's Sanya resort--efforts in the 1990s to get gaming failed.</div><blockquote>That view was echoed by an analyst we talked with who confirmed. "You have local political resistance to gambling among high echelons of the Communist Party. If there is any threat to Macau or the investment sector in gaming, it could come from Japan. And that won't happen for at least six years. Hainan has gorgeous beaches, cleaner air, many visitation spots and forests. I recall back in 1995, the US casino operator, MGM (NYSE) lobbied long and hard to get casinos in Hainan and failed. So they went into a straight hotel deal in Sanya which does very well till this day without gambling, Its hard to see Beijing forcing the issue under any current scenario I can see."</blockquote>Question Two: There was an eruption of media reports in the financial press when word got out that many Hainan hotels were already setting up "approved" baccarat games euphemistically called "Entertainment Bars." The Macau sector was rattled by the news. Are these standard baccarat games" And do they pose a threat?Answer: The games envisioned are not true baccarat. One Sanya hotel executive explained. "You cash in. You buy in, correct. But it's a cashless payout if you win. You don't get cash if you win but coupons or prizes used as comps on the property. "In brief, your so-called winnings can be a hamburger, a discount on a room, an item from a gift shop or a day at the spa. "No serious baccarat players from Macau would consider this serious gambling. It could have some fun appeal to regular tourists as a diversion more like an amusement game center. But for these press reports that touted baccarat coming to Hainan to equate it as a forerunner to real gaming is very misleading. For stocks in the sector to dip on such news is plain silly."Question Three: Does the Hainan business community believe that the central government wants to use the Hainan gaming threat as a way of punishing US owned Macau casino operators?Answer: Our panel was unanimous in making two points. One, as expected, nobody ventured to predict what Beijing might do under "what if" conditions. Two, all agreed that it was most unlikely because it would be uncharacteristic of the carefully calculated responses by the government we see in the tariff disputes thus far. " Its tit for tat. Beijing's priorities are on a capital flight and debt. Most capita deployed in Macau stays in Macau." Question Four: If Beijing intends to dilute Macau's business by approving casinos on Hainan where does that put the logic for its US$15bn investment in the Hong Kong-Zhuhai Bridge? And beyond that, its ongoing project for the light rail link to the China railroad system? The bridge, while servicing the macroeconomy, is largely generating crossings related to Macau gaming.Answer: Projected bridge crossings have been revised downward by the government. It is now forecasting daily traffic at 33,000 vehicles carrying 126,000 passengers The lowered expectations are based on competition administrators see from the Shenzhen-Zhongshan Bridge/rail connection which cuts time across to roughly the same 30-40 minute ride. A bridge connecting the Guangdong mainland to Hainan across the 19-mile strait has been mooted. It is estimated to cost at least US$20bn. Thus far it has not advanced beyond ideas discussed at conferences over many years.Summary: The development of Hainan as both a high visibility free port and a global competitor for tourist dollars is without question a goal for Beijing. However, the role that gaming might play for the foreseeable future according to our sources is at this time so much spin doctoring by speculators not the well thought out bullseye target of Beijing or the mature realty/resort community on Hainan. For that kind of loose speculation to bruise the trade of Macau-centric stocks seems at this point, to be, let's say it--pointless. Much larger questions loom both for operators and Beijing first regarding the future of gambling in China in general and its plans going forward for Macau.<ul>
<li>Reconcession decisions by Beijing and Macau officialdom regarding the existing concessionaire base loom between 2020 and 2023. Current thinking remains positive among operators as to what they see as the evolution of Macau as a diverse, non-gaming amenity, entertainment and gaming destination exclusively sited and not likely to proliferate through China.</li>
<li>The performance of Macau continues on a resumed upside trend. Tax collections are up, employment is up, the quality of life issues for Macau citizens are being addressed by operators and government in tandem. Hainan's current 20 million tourist base appeals to visitors who seek the relaxed, close to nature, beauty, clean air and pristine beaches of that island. That government has invested significant funds over time to dramatically improve the island's environment, build roads and infrastructure, clean up waste sites. The island's basic economy combines an agricultural and tourist blend with the largest segment of manufacturing now gone. Its future as envisioned by Xi is clear: a free trade zone with busy ports creating a massive increase in economic value to its citizens and competitive pressure on its global economic competitors.</li>
</ul>Conclusion: At this point in time we believe that Hainan transformed into a gaming destination to compete with Macau is, to say the least, highly problematical. Therefore baking it into the pricing of Macau gaming stocks as a real contingent risk now or in the near future distorts reality.Hainan has a purer realty play for investors wanting to be part of Hainan's futureThe realty space per se, in Hainan, is crowded with players. We have reviewed the field and like what we've learned about Agile Group Holdings Ltd. (3383HK). The stock presently sits near its one year low at HK$11.68 ff a high of $16.62 reached last May 15th. The company has a solid interest in the Clearwater Bay residential/resort complex in Sanya. It offers an attractive dividend of HK 8.76 yielding what we believe is a solid return given the present turmoil engulfing part of the China realty scene trigger by the takeover last week of Ambang. Its a pure reality/hotel play with a diverse portfolio across China, with a surprisingly low percentage of institutional ownership: 8.36% against public holdings of 25.29% making for what we believe is a very attractive entry point paradigm at its current trade. Investors who may still be animated or enchanted by Hainan should also look at SK provider Lloyd Moffett's insight on Future Bright ( <a href="https://www.smartkarma.com/entities/16759" target="_blank" data-smartkarma-citation="entities:16759:1">Future Bright  Holdings,  (2212 HK)</a> an operator of restaurants who holds high-value developable realty on Hainan.



Hainan's geography fits a standard tourist paradigm

Recurrent reports of imminent development of horse racing, casinos or sports lotteries on Hainan distort realities.

So-called "entertainment bars" presumably evoke baccarat format but winnings are prizes not cash. No threat to Macau.
Four key questions answered to help separate thin conjecture from probable fact.
A former associate, now a realty development consultant was recently tasked by a client to reconnoiter several global tourist sites including China's Hainan Island. Prior to his departure we arranged for us to video conference and evaluate the gaming question of Hainan and meet again upon his return. In the phrase of government security apparatus, our objective was to arrive at a "threat assessment level" of the real, imagined or hyped up prospects of that island building toward becoming a major competitor to Macau integrated casino resorts. Over the past year and a half, I have studied 53 sector analysis and media reports which had alluded to the gaming possibilities of Hainan. My conclusion: Based on my own research and our recent discussions with on the ground sources we believe investors are ill-served by rumors of Beijing imminently planning to set up Hainan as a competitor for gaming dollars now flowing entirely to Macau.What follows are answers to four critical questions my associate and myself posed to knowledgeable sources in Hainan in an effort to get a better grasp on the best opinion and research we could generate on the issue--which as are all issues involving Beijing policies, elusive.BackgroundHainan sits across from, Guangdong, but no bridgeChina has moved over the years to develop Hainan Island as a global free trade port and tourist mecca.(See detail below on Hainan basic stats). Most recently during an April visit, Xi Jinping strongly supported speeding up the growth of Hainan as a place that encourages business, offers a transparent legal system, vigorously protects intellectual property and, suggested that horse racing and sports lotteries could be part of that development paradigm. These remarks triggered a sudden rush of companies registering corporate names with the words "horse racing". The initiatives suggested were seen by many to be an effort to blunt the challenges posed by the Trump tariff disputes as well as an extension of Xi's OBOR project. Our focus on the realistic possibilities for gaming expansion there was compressed into four key questions we had for savvy Hainan locals in the business community.Question One: How real or imminent are the prospects of Hainan being set up as a competitive gaming jurisdiction to Macau beginning in the near to intermediate term?Answer: Tourism is central here. Last year, foreign tourist arrivals to Hainan reached one million. The largest contributing countries to that visitation were Russia, South Korea, and Japan. According to our research, those three nations citizens tend to have a higher than average proclivity for gaming. Hainan received over 20 million total visitors, with 18 million of those arriving at the prime destination resort city of Sanya. So adding this tourist base to the resident population of over 9 million it would seem on the face of it, that the province presents a highly tempting opportunity for the development of gaming.But reality tells an entirely different story. Three successive efforts to legalize, develop and construct race tracks on the island since 1993 have failed. There has been and we learn now, strong resistance to gaming by local government in general and high Communist Party officialdom specifically. We have compressed the consensus of our Hainan panel members into a quote from one major operator who we believe, summed up the sentiment of the group. Note: This quote is a translation:Local authorities are opposed to gaming. Not all, but most. It's a very tricky position since nobody is in the mood to buck the central government, But realistically, horse racing initiatives have a bad history here. There is no appetite for conflict but even if local officials did approve the initiative, we have serious doubts as to the success. There are so many bigger fish we have to fry. If I were holding shares in Macau stocks I would not be losing any sleep over Hainan.Sports lotteries, a form of wagering on the outcomes of games, likewise appears to be favored by the central government. Yet locals are unimpressed thus far. "Said another source, "When we discuss it there are some who favor it but mostly it evokes more yawns than excitement. Also it's an online thing. Just last week Beijing announced it was shutting down online poker because it no longer accepted the principle that it was a game of skill.As to full scope casinos, one member of our panel dismissed that as "no chance in the foreseeable future. Others mostly agreed. His take, "It makes no sense for Beijing. A huge industry has been built in Macau. Xi in my view wants Hainan, Macau and Hong Kong united as a fortress of free trade, but not by eating from each other's bowl of rice..."MGM's Sanya resort--efforts in the 1990s to get gaming failed.That view was echoed by an analyst we talked with who confirmed. "You have local political resistance to gambling among high echelons of the Communist Party. If there is any threat to Macau or the investment sector in gaming, it could come from Japan. And that won't happen for at least six years. Hainan has gorgeous beaches, cleaner air, many visitation spots and forests. I recall back in 1995, the US casino operator, MGM (NYSE) lobbied long and hard to get casinos in Hainan and failed. So they went into a straight hotel deal in Sanya which does very well till this day without gambling, Its hard to see Beijing forcing the issue under any current scenario I can see."Question Two: There was an eruption of media reports in the financial press when word got out that many Hainan hotels were already setting up "approved" baccarat games euphemistically called "Entertainment Bars." The Macau sector was rattled by the news. Are these standard baccarat games" And do they pose a threat?Answer: The games envisioned are not true baccarat. One Sanya hotel executive explained. "You cash in. You buy in, correct. But it's a cashless payout if you win. You don't get cash if you win but coupons or prizes used as comps on the property. "In brief, your so-called winnings can be a hamburger, a discount on a room, an item from a gift shop or a day at the spa. "No serious baccarat players from Macau would consider this serious gambling. It could have some fun appeal to regular tourists as a diversion more like an amusement game center. But for these press reports that touted baccarat coming to Hainan to equate it as a forerunner to real gaming is very misleading. For stocks in the sector to dip on such news is plain silly."Question Three: Does the Hainan business community believe that the central government wants to use the Hainan gaming threat as a way of punishing US owned Macau casino operators?Answer: Our panel was unanimous in making two points. One, as expected, nobody ventured to predict what Beijing might do under "what if" conditions. Two, all agreed that it was most unlikely because it would be uncharacteristic of the carefully calculated responses by the government we see in the tariff disputes thus far. " Its tit for tat. Beijing's priorities are on a capital flight and debt. Most capita deployed in Macau stays in Macau." Question Four: If Beijing intends to dilute Macau's business by approving casinos on Hainan where does that put the logic for its US$15bn investment in the Hong Kong-Zhuhai Bridge? And beyond that, its ongoing project for the light rail link to the China railroad system? The bridge, while servicing the macroeconomy, is largely generating crossings related to Macau gaming.Answer: Projected bridge crossings have been revised downward by the government. It is now forecasting daily traffic at 33,000 vehicles carrying 126,000 passengers The lowered expectations are based on competition administrators see from the Shenzhen-Zhongshan Bridge/rail connection which cuts time across to roughly the same 30-40 minute ride. A bridge connecting the Guangdong mainland to Hainan across the 19-mile strait has been mooted. It is estimated to cost at least US$20bn. Thus far it has not advanced beyond ideas discussed at conferences over many years.Summary: The development of Hainan as both a high visibility free port and a global competitor for tourist dollars is without question a goal for Beijing. However, the role that gaming might play for the foreseeable future according to our sources is at this time so much spin doctoring by speculators not the well thought out bullseye target of Beijing or the mature realty/resort community on Hainan. For that kind of loose speculation to bruise the trade of Macau-centric stocks seems at this point, to be, let's say it--pointless. Much larger questions loom both for operators and Beijing first regarding the future of gambling in China in general and its plans going forward for Macau.
Reconcession decisions by Beijing and Macau officialdom regarding the existing concessionaire base loom between 2020 and 2023. Current thinking remains positive among operators as to what they see as the evolution of Macau as a diverse, non-gaming amenity, entertainment and gaming destination exclusively sited and not likely to proliferate through China.
The performance of Macau continues on a resumed upside trend. Tax collections are up, employment is up, the quality of life issues for Macau citizens are being addressed by operators and government in tandem. Hainan's current 20 million tourist base appeals to visitors who seek the relaxed, close to nature, beauty, clean air and pristine beaches of that island. That government has invested significant funds over time to dramatically improve the island's environment, build roads and infrastructure, clean up waste sites. The island's basic economy combines an agricultural and tourist blend with the largest segment of manufacturing now gone. Its future as envisioned by Xi is clear: a free trade zone with busy ports creating a massive increase in economic value to its citizens and competitive pressure on its global economic competitors.
Conclusion: At this point in time we believe that Hainan transformed into a gaming destination to compete with Macau is, to say the least, highly problematical. Therefore baking it into the pricing of Macau gaming stocks as a real contingent risk now or in the near future distorts reality.Hainan has a purer realty play for investors wanting to be part of Hainan's futureThe realty space per se, in Hainan, is crowded with players. We have reviewed the field and like what we've learned about Agile Group Holdings Ltd. (3383HK). The stock presently sits near its one year low at HK$11.68 ff a high of $16.62 reached last May 15th. The company has a solid interest in the Clearwater Bay residential/resort complex in Sanya. It offers an attractive dividend of HK 8.76 yielding what we believe is a solid return given the present turmoil engulfing part of the China realty scene trigger by the takeover last week of Ambang. Its a pure reality/hotel play with a diverse portfolio across China, with a surprisingly low percentage of institutional ownership: 8.36% against public holdings of 25.29% making for what we believe is a very attractive entry point paradigm at its current trade. Investors who may still be animated or enchanted by Hainan should also look at SK provider Lloyd Moffett's insight on Future Bright ( Future Bright  Holdings,  (2212 HK) an operator of restaurants who holds high-value developable realty on Hainan.

Hainan Island: Prospects or Perils for the Macau Gaming Sector?

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>The data in this insight is collated from the "shareholding disclosure" link on the HKEx website.</li>
<li>Often there is a corresponding HKEx announcement on the increase - or decrease - in the shareholding by directors. Or pledging. However, such disclosures are by no means an absolute.</li>
<li>The key stocks mentioned in this regular insight are <a href="https://www.smartkarma.com/entities/sun-hung-kai-properties-ltd" target="_blank" data-smartkarma-citation="entities:111:1" rel="noopener">Sun Hung Kai Properties (16 HK)</a>, <a href="https://www.smartkarma.com/entities/wuxi-apptec" target="_blank" data-smartkarma-citation="entities:23679:1" rel="noopener">Wuxi Biologics (2269 HK)</a>, <a href="https://www.smartkarma.com/entities/sichuan-kelun-biotech-biopharm" target="_blank" data-smartkarma-citation="entities:40071:1" rel="noopener">Sichuan Kelun-Biotech Biopharm (6990 HK)</a>, and <a href="https://www.smartkarma.com/entities/wisdom-sports-group" target="_blank" data-smartkarma-citation="entities:10451:1" rel="noopener">Wisdom Sports (1661 HK)</a>.</li>
</ul>


The data in this insight is collated from the "shareholding disclosure" link on the HKEx website.
Often there is a corresponding HKEx announcement on the increase - or decrease - in the shareholding by directors. Or pledging. However, such disclosures are by no means an absolute.
The key stocks mentioned in this regular insight are Sun Hung Kai Properties (16 HK), Wuxi Biologics (2269 HK), Sichuan Kelun-Biotech Biopharm (6990 HK), and Wisdom Sports (1661 HK).


HK CEO & Director Dealings (26 Jan 2024): Sun Hung Kai, Wuxi Bio, Sichuan Kelun-Bio, Wisdom Sports

Hong Kong

Future Bright Mining is an investment holding company primarily engaged in the excavation and sale of marble blocks in Mainland China. The company also trades mineral commodities and coals, operating an open-pit marble mine, the Yiduoyan Project, in Hubei Province, PRC. It was founded in 2011 and is headquartered in Hong Kong.

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Future Bright Mining (2212 HK)

Hainan Island: Prospects or Perils for the Macau Gaming Sector?

Recurrent reports of imminent development of horse racing, casinos or sports lotteries on Hainan distort realities. So-called "entertainment...

Howard J Klein

HK CEO & Director Dealings (26 Jan 2024): Sun Hung Kai, Wuxi Bio, Sichuan Kelun-Bio, Wisdom Sports

The data in this insight is collated from the "shareholding disclosure" link on the HKEx website. These insights also flag those companies where...

David Blennerhassett

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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