Table dance (Macau)
(source: The Standard September 18, 2006)
Table dance
Jeffrey Tam
Monday, September 18, 2006
Macau – a once sleepy backwater – is rushing into the future with lots of promises and wads of cash. Most major global gaming conglomerates now hold a stake in the enclave’s future and – like its Portuguese colonizers who arrived in 1553 and left only in 1999 – the new inhabitants are expected to stay for a long time.
But will they? Can they survive the harsh competition gripping the landscape?
Galaxy Entertainment Group (0027) was faced with such questions last week when it reported a first-half loss of HK$734 million compared with profit of HK$14 million for the same period last year. Cut-throat competition had forced the company to pull out all the stops to win more market share.
It worked. Galaxy in August held a 19.8 percent share of Macau’s gaming business versus 7 percent during the first quarter. But the company’s interim results are ample proof that the price of survival in the local gambling sector is heavy.
Financing cost at the company surged to HK$289 million from HK$6 million in the first half of last year. Administrative and other expenses jumped to HK$117 million from HK$31 million, and a one-off pre-opening expense of HK$87 million for its new casino also took a heavy toll on the bottom line.
Galaxy opened two casinos, Rio Casino and President Casino, in the first half. Its flagship, StarWorld Hotel and Casino, was originally slated to open in the third quarter.
But the company’s chairman, Lui Che-woo, says he had pushed back StarWorld’s opening to October 19, after Las Vegas mogul Steve Wynn opened his project on September 6.
“I want to observe a bit more to see what things are like after it [Wynn Macau] opens. I want to be better prepared for StarWorld’s opening,” Lui says.
Wynn has invested HK$9.4 billion to build Wynn Macau, which consists of 600 rooms, 100,000 square feet of gaming facilities, seven restaurants, 28,000 square feet of retail space, a spa and entertainment facilities.
An experienced player in the gaming business, Wynn developed and later sold a number of Las Vegas mega- casino-resorts, including Bellagio, Mirage and Treasure Island.
But he was not the first to introduce Las Vegas glitz to Macau.
Back in May 2004, Las Vegas Sands, chaired by Sheldon Adelson – ranked the world’s 14th-richest person by Forbes magazine – invested US$265 million (HK$2.06) billion) to open Macau’s first foreign-owned casino.
Not only did Adelson break Stanley Ho Hung-sun’s 42-year-old monopoly, the gaming magnate also took Ho on in the high-rollers’ sector, the most lucrative customer segment in the gaming business.
About 57.6 percent of Macau’s total gaming revenue of HK$25.01 billion came from high-rollers in the first half of the year. High-rollers are those customers who play on tables located in the VIP halls of every casino. Single bets at these table must not fall below HK$100,000 and not exceed about HK$2.5 million.
“In Macau, the major income stream of casinos comes from VIP halls,” Vanessa Fan, managing director of Emperor Group, told The Standard Money. The group opened a casino hotel in the enclave in January. Stanley Ho is a passive investor in the project, holding a 20-percent stake.
“Unlike those customers in Las Vegas, most people visiting Macau come to a casino without a budget. Some come by taxi and often leave by bus.”
The fight for high-rollers has raised the commission level for junket agents – middlemen who lure high-stakes gamblers into the casinos, lend them chips and collect any debts incurred.
And that has angered ex-monopoly holder Stanley Ho, who has accused Adelson of taking some of his business away by raising commissions to agents.
Adelson has denied doing so, and claims Sands offers a commission of 1.1 percent to the middlemen – the same as Ho. He laid the blame on fellow American billionaire Wynn. It was Wynn, he says, who had raised the commission to 1.2 percent, stealing the top junket agents in the industry from him.
Phua Wei Seng, the agent recruited by Wynn, accounted for about 36 percent of Sands’ chip turnover of HK$100.1 billion in the year to March. Phua is now working for Sands as well as for Wynn.
Fan from Emperor, however, says customers have been getting smarter, relying less on these agents as they know they have to pay them the extra commission for gambling chips.
“Our casino has a broad network in many provinces of China for high- rollers, so we do not have to rely much on junkets for luring these high-end customers,” she says.
Last month, Stanley Ho revealed that due to the intense competition in the high-roller segment, 50 of the 150 VIP gaming halls belonging to his Sociedade de Jogos de Macau are destined to shut their doors.
“Every casino’s market share and gross profit will inevitably drop as the pie [total gaming revenue] is growing so fast that it draws intense competition,” says Fan.
“But as long as China’s policy remains favorable for visitors to Macau, we will be able to stay comfortable and healthy in the market.”
Beijing allowed mainland residents of several provinces to come to Hong Kong and Macau on individual visits beginning July, 2004. Before the rules were relaxed, mainland citizens were only allowed to visit the two special administrative regions as part of tour groups.
Allowing mainlanders to travel on their own has been a boon for Hong Kong’s and Macau’s tourism industries. But that has not taken any heat off the gaming sector.
Bank of China (Hong Kong) warned in a recent report that Stanley Ho’s market share would drop this year as several big players have arrived in town.
It said Ho’s SJM would command 58.04 percent of the market this year, dropping from 75 percent in 2005. Sands’ share would rise to 18.8 percent from 16 percent, while that of Newcomer Wynn Resorts is expected to hover at 4.14 percent by December.
Las Vegas-based analyst Bill Lerner from Deutsche Bank concurs, warning that gaming revenues would fall in the short-term. But he predicts a healthy outlook for the long term.
The massive build-up of transport infrastructure and the individual visits scheme will boost both revenue per table and total gaming revenues in the enclave, Lerner estimates.
Earlier this month, Adelson said he would invest a total of US$10 billion to finance the development of his Venetian casino resorts on Macau’s Cotai Strip, an 80-hectare piece of reclaimed land between the islands of Taipa and Coloane.
In his giant resort “village,” Adelson plans to build 12,000 rooms, a 50,000 sq ft spa and a concert hall accommodating 2,000. His target is to construct 20,000 rooms by early 2009.
At present there are 10,000 hotel rooms in Macau.
Ho, meanwhile, is not sitting still. He is pouring HK$20 billion into a scheme dubbed Oceanus, which will include a huge shopping mall, hotel, casino and other entertainment facilities.
Melco International Development boss Lawrence Ho Yau-lung, Stanley Ho’s son, is also getting in on the act.
Partnering with Australian billionaire James Packer, chairman of Publishing and Broadcasting Limited, Lawrence Ho has committed HK$10 billion to build City of Dreams, a resort village which will contain three hotels and a 70,000 sq ft casino, opposite Adelson’s Venetian.
But the expansion plan of this Hong Kong-Australian partnership has already hit a very steep hurdle. A plan to spin off 10 to 15 percent of the consortium on New York’s Nasdaq stock market was rejected by Hong Kong stock exchange last week. The company says it will seek a review of the ruling.
Meanwhile, some industry players are expanding beyond the immediate borders of Macau as well as into Southeast Asia. Adelson, 72, plans to build another resort on Hengqin Island in Zhuhai, the Chinese city neighboring Macau.
He has also won the right to build Singapore’s first casino, the Venetian Marina at Marina Bay.
But even as gaming magnates pour money into expanding their empires, the Emperor Group is in no hurry to follow suit, Fan says.
“We count every penny we spend. Cotai Strip is a totally new market, and it usually takes at least a few years for a market to mature.”
Emperor, Fan says, will adopt a wait-and-see approach. But the group has bought a lot of retail property in Macau, which provide stable rental income.
“The expanding gaming industry has drawn a lot of visitors, which will inevitably boost the retail business,” says Fan.
“The rental yield is as high as 6 percent, which is a lot higher than the 3 percent yield in the prime locations of Hong Kong.”
Date Posted: 17-Sep-2006
