“There’s a whole strip of casinos, about 10 casinos, all servicing the Thai market,” says Ben Reichel, Donaco’s executive director. “Our property is the largest, best-quality casino there – 100 gaming tables, 1200 slot machines … it’s probably the same size as The Star casino in Sydney.”
Wherever you go in the world, casinos are a risky business; both for the punters who walk through the doors and dream of going home with full pockets, and for the owners who spend top dollar to create the most luxurious settings, and whose fortunes can swing dramatically on a handful of lucky – or unlucky – winning streaks.
But with a groundswell of new casino licences and an absence of any government regulation on how they operate, casinos in Cambodia are probably as dicey as they get.
“If you operate in Cambodia, you operate at your own risk,” says Peter Cohen, a prominent gaming industry advisor and former regulator who is now with the Agenda Group and helped draft Cambodia’s yet-to-be-introduced casino laws. “You are competing with other operators who may not necessarily be fair.”
The past 18 months have certainly been tough for shareholders in Donaco which listed on the Australian Securities Exchange in 2013.
Less than a year ago, it had a market value of $290 million. Late on Friday afternoon, it was worth $51 million, at a share price of just 6.3 cents.
On the question of what went wrong, Reichel’s reply is frank: “We did a deal with the wrong person. That’s obvious in hindsight.”
The deal he is talking about is Donaco’s 2015 purchase of Star Vegas. At the time the six-storey 385-room resort and casino was generating net profits of about $82 million a year.
The vendor, Thai businessman Somboon Sukcharoenkraisri, also known as Lee Bug Leng, received US$240 million in cash, 147 million Donaco shares (worth $132 million at the time) and two seats on the board.
In return, Somboon would remain as manager and guaranteed earnings of at least US$60 million per year for two years, vowing to make up any shortfall.
The board seats went to his son and a business associate and Somboon was promised a quarter of the profits every year he reached the earnings target.
“This acquisition is a compelling opportunity for Donaco shareholders,’’ Joey Lim, Donaco’s major shareholder and grandson of the casino billionaire Lim Goh Tong said at the time. He set up the company in 2001 with his famous grandfather.
“Shareholders will receive substantial benefits from the increase in size and scale of the company, and the diversification of our revenue streams.”
This was to be Donaco’s second casino complementing the Aristo International Hotel in northern Vietnam. Like the Star Vegas, the Aristo is located on a border and caters to Chinese gamblers who are not allowed to gamble in their own country.
Shareholders will receive substantial benefits from the increase in size and scale of the company.
The Aristo is designed for Yunnan’s middle rich, as opposed to the super rich who travel to Macau or Australia, and their favourite game is baccarat.
The Vietnamese government, which forbids its own citizens to gamble there, owns 5 per cent of the Aristo. But with just one casino, Donaco’s annual earnings were only $15 million in 2014-15. The acquisition of Star Vegas would boost Donaco’s earnings by 502 per cent to $91 million, according to an investor presentation.
Those benefits, however, weren’t to be.
The death of the Thai king, Bhumibol Adulyadej, in October 2016 knocked the business.
“Most Thai people have never known any other ruler,” Reichel explains. “As a mark of respect, Thais stopped indulging and started mourning … they stopped coming to Poipet for about 100 days.”
Subsequently Star Vegas’s earnings dropped 17 per cent for the second half of 2016. It was also forced to cancel a partnership with Manchester United.
To make up for the shortfall in Thai visitors Donaco sought out gamblers from Malaysia, Hong Kong, and Macau by signing deals with new junket operators. Junkets are crucial to Asian casinos, and especially border town casinos with no other attractions. Junket hosts identify deep-pocketed punters and offer them an all-expenses trip to the casino for a few days. Sometimes junket operators lend gamblers money.
Then, just as things were returning to normal and the official mourning period ended, more trouble surfaced. In 2017 Donaco decided it was time to take full control of Star Vegas from Somboon. Joey Lim met with him and the two agreed Somboon would stay on as a consultant earning about $170,000 a year.
Midway through 2017, Donaco discovered, it alleges in court documents, that rival casinos were being set up on land linked to Somboon – including one out the back of a local supermarket – in what Donaco alleges are breaches of a non-compete clause in the sale contract.
The company soon discovered, the court documents continue, that the new casinos had also “poached” the Star Vegas’s lucrative VIP junkets, along with many of Star Vegas gaming staff. Reichel claims this took a substantial slice of the casino’s profits. In 2017-18 Star Vegas’ earnings were $US30.4 million, a 54 per cent decline on the previous year.
“There were four key junkets that had been operating with Star Vegas for probably 10 years or more, and they all up and left in June 2017,” Reichel says.
“With those four, a couple of them were relatively small, then there was a medium-sized junket and then a very big junket who generated a huge volume of turnover and a huge chunk of the revenue of that business. We have recruited other junkets, but they are not as big, and don’t generate the same revenue as the previous ones.”
A storm of lawsuits has since erupted between the two parties. A Cambodian court has issued an injunction to shut down the new Star Paradise with help from video footage of gaming tables hidden behind supermarket shelves.
In Donaco’s main litigation, in the Singapore court or arbitration, the company is seeking US$190 million in damages from the vendor. In the New South Wales Supreme Court, Donaco has also obtained a freezing order against the vendor’s 147 million shares in the company, which are now worth $10.1 million.
In retaliation, Somboon has attempted to terminate Donaco’s lease on the Star Vegas land, and according to court filings, he has made a range of threats against the company in an attempt to “interfere” with its lease rights.
“He has threatened to terminate the lease at the Star Vegas property, he’s threatened to build a wall around it, he cut off electricity to part of the property, he took one of our transformers,” Reichel says.
It’s not pleasant to be threatened with a criminal offence for complying with your legal obligations in Australia.
Donaco’s Ben Reichel
“All of this, as you can see, has totally trashed the share price and is all down the actions of the vendor.”
And to top it all off, Somboon believes he has been defamed by Donaco’s ASX statements.
“Because the ASX website is accessible in Thailand he has initiated defamation proceedings and in fact he threatened to charge us with a criminal offence,” Reichel says. “It’s not pleasant to be threatened with a criminal offence for complying with your legal obligations in Australia.”
According to the court documents, on the afternoon of June 30, 2017, all the slot machines at Star Vegas were turned off and the gambling tables closed.
Somboon allegedly took computers, kitchen equipment and corralled about 550 staff to the new casino.
Around 4pm an announcement came over the speaker system within the casino that the Star Vegas had ceased operation and all players were required to move to the “Star Paradise”, the new casino next door.
Somboon allegedly took computers, kitchen equipment and corralled about 550 staff to the new casino.
He also told VIP junket operators he would not extend credit to their clients and could not guarantee their safety unless they started visiting Star Paradise casino instead.
These junkets were said to be worth about US$30 million a year to the business. Donaco is seeking US$120 million damages, and believes it has a “very strong case”.
Somboon declined to comment when contacted through his Australian lawyer.
Around this same time, with Star Vegas tied up in litigation, things also suddenly got very difficult for the first time at the Aristo International in Vietnam.
The casino’s earnings had taken a massive hit between July and August 2017, primarily due to a single loss to a high-roller VIP gambler, who won $4.6 million. Then, in mid-2018, a long-standing VIP player from Yunnan was losing a lot of money one night and ended up getting into a fight with another player at the table.
The VIP got very upset and decided to use his underworld connections to damage Aristo’s business. The company has told investors that criminals then started meeting Chinese gamblers at the border and physically threatening them and demanding protection money.
“Most of the usual VIP players and junkets from Yunnan province were deterred from visiting the property in July and August, due to threats from the Chinese crime syndicate. The Vietnamese police now have all of the records of the Chinese crime syndicate members, and they will not be allowed into Vietnam,’’ the company told shareholders in November last year.
The Vietnamese government’s 5 per cent stake in Aristo motivated them to act quickly, but not quickly enough to prevent a 93 per cent decline in gaming turnover in the four months to November 2018.
To make up for the sudden drop in visitors from Yunnan, Donaco attracted junkets from Malaysia and bussed in tourists from Hanoi and Ho Chi Minh City. Aristo is expected to be back on track by now.
Adding to Donaco’s difficulties, Joey Lim stepped down from his role of chief executive and managing director in December 2018, citing a need to deal with health and personal matters.
A year earlier he sold 37.5 million shares for $15 million for ‘’private and family reasons” to institutional investors. He still retains 230 million shares or 27 per cent of the company.
His brother, Ben Lim, has stepped into the role, but Donaco has commenced a search for a chief operating officer and deputy CEO to “enhance and strengthen the current management team at both of the company’s casino properties”.
On Donaco’s board of directors is a wealth of business and gaming industry expertise. Reichel is a former general counsel with NSW wagering company Tab Limited (which was later bought by Tabcorp) and racing broadcaster Sky.
Another director, Rob Hines, was Racing Victoria’s chief executive from 2008-2012. However, Hines resigned on December 21, after five years as a non-executive director, and the company is searching for a replacement.
Donaco chairman Stuart McGregor has held top positions at beer giants Carlton & United, Cascade and San Miguel.
With such critical issues to deal with at the board level, there was “certainly no Christmas slowdown for us”, says Reichel.
“We are focusing very intently on dealing with the issues ahead of us.”
With Joey Lim on Leave and Hines’ departure, Donaco has just three directors: McGregor, Reichel and Joey’s brother Ben Lim.
Donaco’s executive team insists the outlook for the company is not as grim as its spiralling stock price suggests. Turnover in the ever-important VIP business at Star Vegas was up 113 per cent, according to the group’s latest trading update.
It has started luring Chinese and Korean gamblers to Poipet to make up for the lost Thai junkets.
The company has moved to assure investors that the problems with the Chinese crime syndicate at the Aristo has now been dealt with by the authorities.
“That business is coming back very nicely,” says Reichel.
Still two of Donaco’s biggest institutional nvestors, Perpetual and Fidelity, recently slashed their holdings in the company.
Perpetual has cut its stake from 68 million shares to 26 million, while Fidelity has gone from 120 million to 33 million shares. Donaco says these cuts have driven its stock price to “unrealistically” low levels that “don’t reflect the value of our assets at all”.
“We think the market reaction to our trading update is vastly overblown,” says Reichel. “We’re confident we can get through this with an improved business in the new year.”
He believes shares should be around 14.5 cents and has announced a strategic review that will finish in March.
“There’s been a lot of approaches made to us, people have various ideas about buying one or both of the assets of joint-venturing, buying part of the assets. We are in discussions with our major bank, (Taiwanese) Mega Bank, about restructuring the ($US100 million) loan agreement we have with them,’’ he says.
In recent days the Singapore-based hedge fund OCP Asia took out a 9.3 per cent stake in the company.
According to the Cambodian government, there were 150 active casino licences at the end of last year, up from fewer than 100 in 2017. Cambodia’s long-touted casino regulations, if they pass this year, as some expect, will introduce a tax on gross gaming revenue, licensing requirements, and rules and tests around casino products.
One of the main aims of the bill, explains Cohen, is to encourage greater foreign investment in the Cambodian gaming industry by benefiting stronger operators and squeezing out the less reputable businesses.
But in a country like Cambodia, question marks remain over how effective any new regulations will be.
“Enacting laws is one thing,” Cohen says, “enforcing them is another.”
Lucy Battersby has covered trends, technology and telecommunications since joining The Age in 2008.
Business reporter for The Age and Sydney Morning Herald.