Nagasakis Three Horse Race

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Three candidates remain in the race to be selected by Nagasaki as its IR operator. IAG looks at the contenders and makes a judgment call on who the favorite should be.

After a stagnant and coronavirus-affected 2020, the race for Japanese integrated resorts has intensified in 2021.

Dutch-inspired theme park Huis Ten Bosch is the selected site for a Nagasaki IR.

Of the four contests in the Japanese locations to have formally declared their interest in being one of up to three Japanese IR sites, the quest to become Nagasakis officially selected operator is arguably the most competitive. With MGM in Osaka and the Clairvest-led consortium in Wakayama both enjoying last man standing status, and Yokohama down to a Genting Singapore versus Melco Resorts two-horse race, which neither may win if the 22 August mayoral election result goes the wrong way, it is Nagasaki providing the intrigue right now for IR industry commentators.

After launching its RFP process on 7 January this year, Nagasaki culled five interested parties down to three in March. The winner is currently slated to be announced in late August.

Nagasaki has consistently and vigorously promoted itself as a candidate IR site for years, while arguably more attractive locations across the length and breadth of the Japanese archipelago have come and gone. The site is long established: the Huis Ten Bosch (HTB) theme park some 20 minutes drive south of the center of Sasebo City. Located on Omura Bay, the theme park opened in 1992 and features recreations of Dutch buildings including a Royal Palace. After some early success, the theme park fell on harder times in the 2000s and was eventually acquired by HIS, a Japanese travel agency, in 2010. HIS then injected US$20 million to develop the property. For more on the HTB site, please refer to another article in this issue of, by my colleague Shintaro Kamimura.

A Nagasaki IR is seen as a potential benefit to the entire Kyushu region.

Last month HIS announced HTB suffered a loss of US$2 million for the year ended 31 March 2021, in a year that saw domestic and international tourism ravaged by the global pandemic. Nagasaki has heralded the IR project as a chance to reinvigorate not only HTB, but Sasebo, Nagasaki and the entire island of Kyushu at the western end of the country. The Kyushu Governors Association (KGA) has long endorsed the project, which means the Nagasaki IR enjoys support from the entire region the KGA comprises the governors of all seven Kyushu prefectures plus the governors of Okinawa (to the south of Kyushu) and Yamaguchi (just east of Kyushu), as well as the Chairmen of the Kyushu Economic Federation, the Federation of Kyushu Chambers of Commerce and Industry, the Committee of Kyushu Keizai Doyukai and the Kyushu Employers Association.

The launch of the Kyushu IR Promotion Council on 12 April 2021, with Yutaka Aso as chairman, further signalled the regions support. Part of an esteemed family counting Japanese royalty and politicians in its ranks, Asos elder brother Taro Aso has been Japans Deputy Prime Minister and Minister of Finance since 2012 and was Prime Minister of Japan from September 2008 to September 2009.

Samuel Yin Shao Yang, Associate Director of Maybank Kim Eng Investment Bank, recently estimated the Nagasaki IR would see annual gross gaming revenue (GGR) of around US$1.5 billion annually. This should equate to an annual bottom line in the hundreds of millions of US dollars.

So, which of the final three candidate operators is likely to win this glittering prize? Lets start by meeting the trio.

Casinos Austria has long expressed its interest in an IR in Nagasaki. Founded in Austria over 80 years ago, the company is one-third owned by the Austrian government via a sovereign wealth fund. It owns and operates casinos, lotteries and online betting, including 12 casinos in Austria, but these are small properties, averaging around 20 tables and 200 slot machines apiece. Their international operations are even smaller, with 13 casinos outside Austria averaging less than 10 tables and 120 slots apiece, although they do operate the Reef casino in Cairns, Australia, which has approximately 40 tables. The company has bought and sold over 70 casinos in around 25 countries over the past 45 years. These figures were supplied to IAG by the company itself.

THE NIKI is an offshoot of NIKI Club, which previously ran NIKI Resort a nature resort located in Nasu, Tochigi which closed its doors in 2017 after 31 years. Its partner Chyau Fwu (Parkview) Group is linked to the construction and development company Chyau Fwu, which was established in 1950 in Taiwan. Their experience is mainly in the development and operation of MICE and commercial facilities as well as office buildings in major Asian cities including Beijing and Singapore. The partnership is yet to officially announce an operator partner.

A complete unknown in the IR world, THE NIKI desperately needs a well-known operator partner to boost its IR chops with a name the industry will recognize.

Oshidori International Development is a company formed specifically to bid for the Nagasaki project, supported by its parent company Oshidori International Holdings, a financial services company listed on the Hong Kong Stock Exchange. Its greatest assets have been the hiring of key former MGM Resorts executives from Las Vegas with decades of IR experience, and its announced operator partner of Mohegan Gaming & Entertainment (MGE), long time operator of the Mohegan Sun integrated resort in Connecticut. With around 300 tables, 5,000 slot machines and 1,500 hotel rooms, Mohegan Sun is unquestionably a bona fide integrated resort. MGE recently opened a new property, Virgin Hotels Las Vegas, and is also developing Inspire, a US$1.6 billion integrated resort in Korea.

Casinos Austria

Of the three candidates, Casinos Austria was the only company that chose not to specifically address each of our questions, although the company did send IAG some generic information about its activities in Austria and abroad.

Casinos Austria operates The Reef Hotel Casino in Cairns, Australia.

The CEO of Casinos Austria International Japan is Mr Akio Hayashi, who owns TES Holdings, a regenerative medicine company. He was awarded a medal from the city of Vienna in 2017, has done charity work with the Vienna Boys Choir and is married to Sachiko Kobayashi, a famous Japanese enka singer. IAG interviewed Hayashi in July last year.

IR TRACK RECORD

Niall Murray is an industry veteran with experience spanning decades from Las Vegas to Macau. Hes been taking an especially keen interest in Japan in his capacity as Chairman of Murray International, a boutique integrated resort consulting firm.

Casinos Austria has a very solid reputation for operating small European-style casinos, Murray says. However, they do not have experience in designing, developing and operating large integrated resorts.

Of its current operations, perhaps the closest to an IR is the Reef Casino in Cairns, Australia, but this property only has around 40 tables, 500 slot machines and 127 hotel rooms. According to its 2020 financial report, the current market value of the Reef property is US$102 million, around 3% of the amount most commentators are expecting to see invested in Nagasaki. Casinos Austria International claims it operates 300 tables in 25 casinos in 11 countries around the world but a 300-table floor is the typical size of just one major IR facility in Las Vegas or Macau.

FINANCIAL CAPABILITY

According to figures supplied to IAG from Casinos Austria International, its entire gaming revenues since launching operations outside of Austria in 1977 is 240 million. Examination of recent balance sheets shows total equity for the entire Casinos Austria group of around 400 million (JPY 52 billion) and for Casinos Austria International of around 70 million (JPY 9.2 billion), significantly short of the JPY 350 billion or more which most analysts are talking about as a ball-park investment for Nagasaki. Of course, Casinos Austria almost certainly plans to have consortium partners and there will also be funding through debt, but even so there is a very large funding gap for Casinos Austria to bridge.

Casinos Austria is not a very large player in the IR industry and does not have access to an extremely large war chest, offers Murray. However, the company has a number of factors working in its favor when it comes to raising finance. For example, Director General Bettina Glatz-Kremsner and Director Martin Skopek have very solid banking and finance backgrounds. Raising finance will be challenging but with their solid reputation, the backing of the Austrian Government and Bankhaus Schelhammer & Schattera as a significant shareholder, it may be feasible.

Casinos Austria manages around 2,000 square meters of event space in Europe and around 1,500 square meters of event space in Australia. With Nagasaki requiring 20,000 square meters of expo space and meeting space for 6,000 people, its difficult to see how Casinos Austria can have the requisite experience. Murray agrees. Casinos Austria do not have the extensive large-scale MICE expertise, experience nor track record required by the Nagasaki government, he says. They have never developed or operated MICE facilities at the level and scale of leading IR operators such as Sands China and MGM. To meet the MICE expectations of the Nagasaki government they must either recruit a highly experienced MICE leadership team or add a significant MICE operator to their consortium.

PROBITY

With operations for decades in dozens of countries around the world, you would expect the senior executives of Casinos Austria to have endured endless probity checks. Casinos Austria is one-third owned by BAG, an acronym for sterreichische Beteiligungs AG (in English Austrian Holdings), an Austrian sovereign wealth fund. But even an association with government hasnt kept Casinos Austria free of compliance issues over the years. A quick google search turns up several cases where Casinos Austria found itself in court on a range of allegations, including some relating to gambling addiction issues.

For example, a former CFO of Casinos Austria, Peter Sidlo, who held the role from March to December 2019, filed a 2.3 million unfair dismissal lawsuit against Casinos Austria. Alleged to be woefully underqualified for the Casinos Austria post and fired for gross breach of duty and inflicting serious damage to the reputation of Casinos Austria, Sidlo was allegedly part of a political scandal involving the countrys former far-right Vice Chancellor, Heinz-Christian Strache, and the privately held Austrian gaming giant Novomatic, which at one stage owned around 17% of Casinos Austria. Novomatic has since disposed of its interest in Casinos Austria, and Strache resigned.

OPERATOR PARTNER

Given Casinos Austria is a gaming operator, it would be expected that they would operate the casino themselves, so the more interesting question here is which other entities Japanese and overseas they will partner with. Theyll need consortium partners to access funds, plug capability gaps and access local Japanese know-how and connections.

Casinos Austria will need to form a consortium consisting of leading Japanese construction, transportation, travel, security and MICE companies, banks and financial institutions, says Murray. Theyll need these companies in their camp in order to successfully develop an IR in Sasebo and navigate the challenging business environment and cultural norms and expectations in Japan.

It seems unfeasible for Casinos Austria to execute on a Nagasaki IR without a significant number of consortium partners. However, despite Casinos Austria being interested in Nagasaki for many years now, none have been announced.

CONTRIBUTIONS TO THE LOCAL COMMUNITY

Were yet to see Casinos Austria getting out and engaging with the Nagasaki community, so its hard for us to draw any conclusions here. Murray does note the companys CSR efforts in their home base of Austria.

Casinos Austria has a very solid reputation for taking their community relations, corporate social responsibility and sustainability strategies seriously in all business units and corporate functions, he says. The Director General leads such initiatives through a CSR Forum, and there is a CSR clause in all key employee contracts.

Although Casinos Austria have not undertaken major or significant community engagement activities to date, I do believe they will execute best practices in Japan to operate in an appropriate manner beneficial to the local community. Casinos Austria typically conduct community engagement activities in a very strategic, inclusive, measured and controlled fashion.

THE BOTTOM LINE

The biggest factors for us regarding Casinos Austria are:

  • The lack of experience operating large integrated resorts with hundreds of tables, thousands of slot machines, over 1,000 hotel rooms, dozens of restaurants and a major international MICE facility of tens of thousands of square meters;
  • The companys unwillingness to name any consortium partners, which begs the question: do they have any?
  • A huge question mark on financing. Where is the money coming from?
  • THE NIKI

    Weve published THE NIKIs answers to our questions verbatim below.

    IR TRACK RECORD

    Our consortium is formed with some of the most experienced professionals in the sector. Companies and executives have worked at each of the top five gaming operators worldwide. This includes designing, constructing, opening and managing the largest IRs in Las Vegas, Singapore, Macau, Australia, Philippines and Europe.

    FINANCIAL CAPABILITY

    The planned investment amount is approximately JPY 350 billion (US$3.2 billion). Equity has been raised by our consortium members and global institutions, but names cannot be disclosed yet due to confidentiality reasons. For debt financing, we plan to raise funds from investors including investment banks, consortium partners and Japanese domestic banking groups.

    MICE EXPERIENCE

    Our company has experience running MICE events in a number of jurisdictions, and our MICE executives have been involved in creating, developing and running one of Asias top three MICE international destinations. These include all aspects of M, I, C and E, from large-scale world exhibits to smaller and more intimate quality meetings, large scale conventions from some world-leading companies and major events that are transmitted live globally.

    The operation in Nagasaki would be smaller in scale, but we would make our experience and global connections work for the region, bringing MICE clients and spend to the resort. Importantly as well, we have designed facilities that include studios for global transmission in a post-COVID world and have planned facilities that are flexible and allow for multi-purpose use in periods that are traditionally low for MICE activities.

    PROBITY

    Partners and executives have been vetted in several gaming jurisdictions, including National Capital Region, Australia; Victoria, Australia; British Columbia, Canada; Macau; Philippines; Singapore; Arizona, USA; Colorado, USA; Louisiana, USA; Missouri, USA; Nevada, USA; New Jersey, USA; Native American Gaming, USA; West Virginia, USA; and Washington, USA. They also have been vetted in a number of jurisdictions in the European Union.

    Chyau Fwu (Parkview) Groups projects include Parkview Square in Singapore.

    OPERATOR PARTNER

    We have selected one of the worlds top five operators, bringing a wealth of expertise in designing, developing and operating IRs. The operator also brings huge expertise in bringing large-scale and quality tourism that contributes to the success of the project and to the local community. Their IR and safety systems are second to none as are their sales, guest relations and loyalty management systems. Operating in Nagasaki requires unique skills in attracting premium Asian and world guests to discover, enjoy and return to an area they might not yet be familiar with.

    CONTRIBUTIONS TO THE LOCAL COMMUNITY

    We have been working on this project now for a while and have developed strong links with local businesses and community partners. The site is unique in that it integrates into an area that has attractive existing tourism features. Our IR is conceived to be in synergy and not in competition with that. It is an opportunity to revive the region and to have each of the existing facilities around the IR play an important part in making the overall project successful for the region. The local community will also integrate in our focus on purchasing locally and with SMEs from the region. We are giving local companies a special place in the IR itself from F&B to retail and entertainment. Finally, we are grouping local partners to enter the consortium itself. Our IR is a project designed for and with the region, with national and global scale.

    The NIKI has partnered with Taiwans Chyau Fwu (Parkview) Group for its IR bid.

    THE BOTTOM LINE

    Operating a major integrated resort requires a highly specialized set of skills which can only be acquired by a company with years, or even decades, of experience. Nagasaki cannot afford to take a risk on two companies whose claims to fame are running a nature resort and construction. It is clear THE NIKI desperately needs a major international IR company with extensive experience to boost its bid. A company like Melco would make a lot of sense given its clear interest in Japan and its status as a major player in the global IR space, and this idea has been raised by several commentators.

    The rules of the Nagasaki selection process preclude any company holding a 5% or higher stake in a Nagasaki bid from bidding for other locations, and Melcos current focus is clearly on Yokohama (or even Tokyo should it enter the race), but one thing we have learnt about the Japan IR process is that anything is possible.

    Oshidori

    Again, weve published Oshidoris answers to our questions verbatim below.

    IR TRACK RECORD

    Our team has vast experience in IRs and has been involved in the design, development, opening or management of 52 IRs around the world, including the following major IRs: MGM Grand (Las Vegas), MGM Grand (Detroit), Bellagio (Las Vegas), Mirage (Las Vegas), Mandalay Bay (Las Vegas), Marina Bay Sands (Singapore), City of Dreams (Macau), Venetian (Macau), Wynn (Macau), Wynn Palace (Cotai), Borgata (Atlantic City), Tropicana (Las Vegas), Beau Rivage (Mississippi), Mohegan Sun (Connecticut), Casino Niagara (Niagara Falls), Fallsview (Niagara Falls), Virgin Hotels (Las Vegas), ARIA (Las Vegas), MGM (Macau) and Galaxy (Macau).

    FINANCIAL CAPABILITY

    Our current budget for the project is JPY 480 billion (US$4.3 billion). We have written, irrevocable equity commitments amounting to JPY 460 billion (US$4.2 billion), and we expect to have a letter from a major investment bank opining that they are highly confident about raising JPY 185 billion (US$1.7 billion) of debt for the project. So, we will end up having more funds available to us than we need to complete and open the integrated resort.

    Mohegan is developing Inspire Korea in Incheon, South Korea.

    MICE EXPERIENCE

    Our MICE facility will be operated by Oshidoris experienced management team, which will leverage its international expertise and superior credentials in sales and marketing to build and operate a world class venue. The Oshidori team has opened and managed some of the worlds largest convention centers, including more than 371,000 square meters of convention space at MGM Resorts International in Las Vegas, which is more convention space than currently exists in all of Japan. Over a five-year period, the team generated more than 100,000 MICE international occupied room nights. In addition, our partner Mohegan Sun operates the largest MICE facility in the northeastern United States, with a total of more than 43,000 square meters of meeting and convention space, and is currently building an international MICE facility in South Korea.

    PROBITY

    Our team members have been licensed in the following jurisdictions: Nevada, New Jersey, Michigan, Mississippi, Australia, South Africa, Isle of Man, Canada, Connecticut, South Korea, Louisiana, Pennsylvania and Washington state.

    OPERATING PARTNER

    Our operating partner is Mohegan Gaming and Entertainment. Mohegan owns or operates eight resorts around the world, including Mohegan Sun in Connecticut, Mohegan Sun Pocono in Pennsylvania, Resorts Casino Hotel in Atlantic City, Ilani Resort in Washington State, Paragon Casino Resort in Louisiana, Casino Niagara and Fallsview Casino Resort in Niagara Falls in Canada, and Virgin Hotels in Las Vegas in Nevada. In addition, MGE is developing the Inspire Entertainment Resort in South Korea. MGE has an extensive track record of operating casino resorts around the world.

    Mohegan Gaming & Entertainments US flagship is tribal casino Mohegan Sun in Connecticut.

    CONTRIBUTIONS TO THE LOCAL COMMUNITY

    Our current target date for the opening of the IR is 2027. When the IR opens, we expect to employ approximately 8,000 people, with quality high-paying jobs that are currently available only in major cities like Tokyo. We will give priority first to employees from Sasebo and Nagasaki, then to the rest of Kyushu, then to the rest of Japan, and then to employees from outside Japan to the extent needed for language or other skills.

    In 2019, Oshidori established the Kyushu Oshidori Childrens Foundation in support of children and youth of all ages, from pre-school to graduate school, in the Kyushu region. The goal of the Foundation is to enhance the lives of children and youth in Kyushu by providing financial aid to disadvantaged and vulnerable families, by improving school facilities and teaching qualities, and by facilitating high school and college students to study abroad. In July 2020, the Foundation donated JPY 20 million to Akai Hane (Nagasaki Community Chest Association & Social Welfare Corporation) to support flood relief efforts in Nagasaki Prefecture. On 5 May 2021, Childrens Day, the Foundation donated JPY 10 million yen to seven child welfare institutions in Nagasaki. The Foundation owns 18.8% of Oshidoris parent company which is traded on the Hong Kong Stock Exchange.

    THE BOTTOM LINE

    Oshidori is clearly the most aggressive and forthright of the three candidates in its approach. In dealing with IAG through this process, we also found them to be the most organized and professional, and the most willing to be open with us about their plans. Oshidori is the only candidate of the three to have a physical office on the ground in Nagasaki. In our discussions with them, its clear the Oshidori leadership has a firm grasp on precisely what an integrated resort is and the unique issues that will need to be faced. Its existing team of executives is heavily historically connected to MGM Resorts in Las Vegas, but there also seems to be a decent smattering of executives from Asian IRs, and Oshidoris partnership with Mohegan adds yet another layer of skills to their team. Their connection to Hong Kong has been raised by some as an issue for Japan, but it should be noted that Chinese conglomerate Fosun Group was in talks to sell 25% of HTB in 2018, so there is already a precedent for possible Chinese investment in the area.

    CONCLUSION

    Of the three candidate consortia Casinos Austria, THE NIKI and Oshidori in the view of IAG, with the information available to us at the time of publishing, Oshidori is best placed to operate an IR in Nagasaki. However, there are other factors yet to emerge, so our view will need to be continually updated as those factors roll out from now until the final announcement expected in late August.