Boom Times May Be Over at Island Casino for Chinese High Rollers

(Bloomberg) -- Four years after it arrived on the remote U.S. territory of Saipan, Imperial Pacific International Holdings Ltd. is faltering in its effort to turn the obscure island into a gambling hub to rival Macau.

In August the Hong Kong-based company, which attracted attention across the gaming industry for the vast volumes of bets recorded in its Saipan operations, reported a 51 percent decline in first-half revenue that sent earnings tumbling by more than 90 percent. At the end of June it had almost 8 billion Hong Kong dollars ($1.02 billion) in uncollected debts from gamblers -- more than Macau casinos that cater to the highest of high rollers. Imperial Pacific faced problems that required it to delay paying some Saipan workers in August, according to local media and an internal memorandum seen by Bloomberg News.

Boom Times May Be Over at Island Casino for Chinese High Rollers

Saipan’s regulators last month approved four junket operators that can work with Imperial to bring high-stakes players to the casino, which caters to Chinese high-stakes players. The operator also received a two-and-a-half year extension to complete the 340-room hotel that it committed to building atop the gambling facility, saying that a shortage of workers was slowing progress.

Federal Investigations

The setbacks for Imperial Pacific may threaten one of the most unusual, and controversial, resort projects in recent gambling history. Saipan, the main landmass of the Commonwealth of the Northern Mariana Islands, is located more than 5,000 miles from the U.S. mainland, and was captured by American troops in one of the bloodiest battles of the Second World War’s Pacific campaign. After the local garment manufacturing industry collapsed in the early 2000s, the island was left with virtually no economic base -- until Imperial Pacific’s casino, which opened in 2015, began posting betting volumes that shocked industry veterans, some of whom said there was no way to generate them legitimately.

Imperial Pacific has always disputed the assertion, countering that it complies with all relevant regulations and has anti-money-laundering procedures in place. Imperial Pacific declined to comment for this article.

The casino operator, controlled by Chinese businesswoman Cui Lijie, has become by far the largest outside investor in Saipan’s history and a significant force in local politics. The company has acquired long-term land leases on the island. Among others, it’s entered into financial transactions worth millions of dollars with relatives of the territory’s governor, Ralph Torres, a staunch supporter of the project. Both Imperial Pacific and Torres, who is campaigning for a second term in November’s general election, have denied that there is anything improper in their relationship.

Imperial Pacific’s construction efforts have slowed ever since U.S. prosecutors, acting on arrests by the Federal Bureau of Investigation, said that many Chinese workers on the site employed by the company’s contractors had arrived posing as tourists, and were working illegally. Separately, federal inspectors said conditions on the casino site were unsafe. Imperial Pacific has blamed those alleged violations on its contractors, and said it had no knowledge of any illegally employed workers, or of substandard construction practices.

Now, the financial viability of the facility is unclear. As Imperial Pacific began posting per-table betting volumes that outstripped the grandest Macau casinos, “what was largely unknown at the time was the amount of uncollected debt that was rapidly accruing," said Andrew Klebanow, a senior partner at Global Market Advisors, a gaming industry consultancy.

A comparison with Wynn Macau Ltd., which also caters to so-called VIP players, illustrates the depth of the issue. The Macau operator posted first half casino revenue of HK$16.5 billion -- almost eight times more than that of Imperial Pacific -- yet Wynn’s uncollected debts from gamblers were less than one-tenth of Imperial’s.

Imperial Pacific also “may have underestimated the challenges of building a resort on an island in the middle of the Pacific," said Klebanow.

In asking island regulators for more time to complete the project, the casino operator cited a “drastic reduction and non-availability” of skilled labor in Saipan, which has a population of just 50,000. According to local regulators, delays resulted in part from a substantial work stoppage that followed the FBI’s actions. In subsequent months, the number of workers on the site fell to as low as 200, compared with at least 1,500 staff that Imperial said it needed to complete the project, according to the license extension document.

Executive Departures

The extension of the resort completion date, to February 2021, was the latest of several instances in which Saipan’s government has eased the conditions of the company’s license agreement. As consideration for the extension, Imperial Pacific agreed to donate $500,000 to the island’s cash-strapped hospital, according to a stock exchange filing.

Investors have reacted negatively to Imperial Pacific’s recent setbacks. The company’s Hong Kong shares have declined almost 52 percent since mid-2017, reducing its market value to about $1.13 billion. Inventive Star Ltd., a holding company controlled by Cui, has steadily increased its stake at the same time, and currently owns almost two-thirds of Imperial Pacific.

The gaming operator has also experienced high-level executive departures. Marco Teng, a former human-resources manager who was serving as chairman of the Saipan operation, resigned in August, as did Cai Lingli, a senior executive and board director. Cai had a broad range of responsibilities and signed off on the company’s various agreements, including land deals with relatives of Torres. Teng resigned to pursue other interests while Cai stepped down to spend time with her family, according to company statements.

Imperial Pacific’s setbacks in Saipan present local citizens with a dilemma. The building of a mega-casino is a divisive issue on the island, and opposition politicians have consistently called for Torres to be less accommodating toward the company and to force it to contribute more to local coffers. Unlike most casinos elsewhere, Imperial Pacific pays no gambling-specific taxes.

On the other hand, Saipan has few prospects for economic development or large-scale employment, and losing the casino project would be a significant blow for the island’s economy.

With Imperial Pacific’s ability to deliver unclear, Saipan may need to consider granting a license to a second casino operator even though the company was granted the sole license, said Ed Propst, an opposition lawmaker.

“We have the right to do so, because they haven’t lived up to their agreements,” Propst said.

©2018 Bloomberg L.P.