Sands Macau Casino Up For Grab?

 

Commentary by: Expert IR

 

Press Report

HONG KONG (27 Apr 2009) – LAS Vegas Sands is considering selling one of its Macau casinos, a report said on Monday, as revenues plummet in the world’s biggest gaming market.

 It plans to put the Sands Macao up for about US$1.3 billion (S$1.95 billion) after failing to sell its luxury shopping centres in the southern Chinese territory, the South China Morning Post said without naming sources.

 The report said Las Vegas Sands was considering selling the building and continuing to run the 21,274 sq m casino while paying the new landlord rent based on performance..

 

Expert IR says: What’s in the Nutshell

I vividly remember that the Sands Macau Casino was built with a price-tag of USD240m in 2004. Full investment costs were recouped just within an unprecedented timeframe of 11 months after the property commenced its operations.

Financial crisis or not, does the property really worth the asking price of USD1.3 billion? And who would buy over a casino in Macau and continue to let the seller to run it and take a rent? (And to top it of, rents that based on performance!).

What it means is that, “You pay me the money (USD1.3b) and I would keep running my own business. And if I do make money, here’s your rent. And if I don’t make it good… too bad”.

But who knows? This Sands Macau Casino could be a gold mine. But let me just refresh some interesting figures from my gathered information,

 

LVS Macau operations – EBITDA

–          Averaged EBITDA for year 2006:  Approx. USD440m (single property – Sands Macau Casino)

–          Averaged EBITDA for year 2007:  Approx. USD408m (with Venetian Macau Cotai-Resort opened in Aug 2007)

–          Average EBITDA for year 2008:   Approx. USD388m – USD620m (two casino properties in operations). (Averaged EBITDA for the industry in Macau was 12.5%)

 

It is interesting to know, ultimately, how much EBITDA margins a potential new buyer of Sands Macau Casino (with 700+ gaming tables) can hope for in order to receive a proper (equitable) rent from Mr. Adelson?

In fact, this idea of letting others bear the risk of investment and receive rental returns is not new, for Cotai development in the territory. In early 2004 LVS had already tried this with potential branded hotel property investors/managers for them to build casinos within invested hotel properties and LVS would only pay rentals for the casino space they would operate. The rest is history.

 

Then you might ask why the hell they (LVS) are trying this again, when it failed even in the early days of booming Macau?

The answer is very basic and simple: That LVS remains a sub-concessionaire of casino license (branched out from Galaxy Entertainment Group). They are not allowed to resell the sub casino license.

It is only possible unless Macau government go ahead to admen the rule of the game. But then again, it opens a bigger floodgate for the rest! And it will be Choas.

 

With my observation, LVS may consider the following,

 

(1)  That they could rally strong junket syndicate groups in Macau, Hong Kong and mainland China, pool resources to buy over Sands Macau Casino (without a license) under one single management company. Hence, what it means is to operate the casino per se as a mega “Junket-Rooms Supermart”… Under this arrangement, LVS would still have to negotiate on more equitable shared casino revenue with the potential buyer under this scheme.

 

(2)  That they could offer the casino per se like a REIT (same as retail malls’ trust). The rest is about working out an acceptable (equitable) detailed terms & condition for investors with casino revenue/profit split or dividend. 

 

In my opinion, owning a casino space regardless of how big it is, it is just a nightmare without at the same time owning a valid casino license or at least to be able to run the casino. Therefore the answer is clear, to the fundamental question: Who would pay USD1.3b for a casino that does not include at least a part of the gaming license?  

 

In essence, I would think that LVS has run out of options at this stage of the game. They are competing not with their competitors but with TIME. LVS is rushing to,

–          Create new revenue sources that could sustain their ongoing short-term operations and current projects, such as Marina Bay Sands and Penn, USA.

–          Cutting down costs drastically.

–          Capital and long-term loans restructuring.

 

It is a huge challenge ahead for LVS, and a very wrong timing though.

 

Take A Closer Look … On Macau

Not So bright a 1^st Quarter… for Macau Casinos

–         by Expert IR

 

(Sources from the news… 20^th April 2009)

 

It was reported in the news that Macau’s casino/gaming revenue for the first quarter of 2009 increased by 8% overall against 4^th quarter of 2008. Comparing the 1st quarter, the figures reported are as follows:

 

l          First quarter 2009  –  Mop26.2b (approx. USD3.3b)

l          4th quarter 2008    –  Mop24.8b (approx. USD3,1b)

 

Based on the reported figures above, it works out to about merely 6.5% increase in overall gaming revenue from the 4th quarter of last year. But what is more interesting and of concerned would be the revenue for VIP Baccarat (high-rollers, junket operations), indicates a drastic drop of 19.1% compared with first quarter 2008. Quarter on quarter the gaming revenue dropped by 12.8% compared to first quarter 2008.

 

If I were to recall a few years ago, with professional investment analysts praising the Asia’s Las Vegas (in Macau) project, had projected its dreams stretching into the stratosphere. Some heavy weight investment research firms had concluded and projected the following ‘conservative’ growth figures,

 

l          Mass gaming revenue growth by CAGR of 27% all the way till 2012.

l          VIP gaming revenue growth by CAGR of 9 – 12% all the way till 2012.

 

In hindsight, we are more sober now thanks to current economic crisis that wakes us up from the dreams. In most cases, investors tend to relate the phenomenon of mainland Chinese’s casino gambling habits in Macau as the absolute yardstick for casino resorts investment in every part of Asia. What this perspective means is, people were holding too simple a mindset on return on investment for gaming industry, resulting in very loose and abundant credits and relatively easy asset gathering process for funding of casino resorts development in Asia.

 

As this is not an investment report, so I could adopt a more ‘freehand’ style in discussing several issues that I have identified for better understanding of Macau’s unique status and why I would think that the ‘gaming pie’ will not keep growing as those professional money people wish for. Sorry for that.

 

What Is This Macau Phenomenon?

 

The liberalization of casinos in Macau is not a wishful thinking that many western casino investors thought to be – to free up Stanley Ho’s hold on the territory, allow a fair play in gaming industry and introducing international gaming standards into Macau. Or simply put, ‘now you Las Vegas casinos can come in to make your monies from mainland Chinese; and by the way, offer jobs to the locals”. 

 

In essence, the above wishful thinking is completely wrong. That I don’t even need to explain to you guys. The policies introduced on Macau by the Chinese Central government in Beijing in the last few years (since end of 2005) would clearly tell us, ‘look guys, I won’t chop off the whole arm and give that to you; but maybe some blood transfusion from time to time can be arranged.’ Indeed, this is the exact words spoken to me (of course it was in mandarin) when I met up with a senior Chinese official two years ago, in Macau. By then the Central government had already acquired a good assessment of the pros and cons of liberalization of casinos in the territory. Simply put, they firmed up their conclusion and also their mind.

 

So what exactly the phenomenon Macau is creating? This can be examined from a few dimensions, as follows.

 

From a broader strategic view, Macau is no different from Hong Kong, it has to be successful in its social and economic development based on the late Mr. Deng Xiao Ping’s One Country – Two Systems evolving concept and, be a powerful window-display that showcases to Taiwan. This is a noble mission (for China) and a great concept put in place by the Communist Party of China.

 

Economically, yet Macau is so different from Hong Kong., without like Hong Kong a much stable, well developed society that boasts international trades and financial centre based on balanced economic structure. Macau has only the casino. So in 2002 when the legislative law was put in place to liberalize the gaming industry, it was to rely on gaming as the prime-mover to attract large scale direct investment into the territory. The Chinese government would think that within 5 – 10 years time Macau will succeed in developing for itself a more balanced industrial structure with diversified economic outputs. Hence, allowing Macau to better integrate into the larger Southern China economic region (the 9 + 2 development concept).

 

The rest is history.

From late 2005 onwards Chinese government had introduced several restrictive measures to start limiting the rampant outflow of illegal RMB (Chinese Yuan), said to be of at least RMB600b a year by end of 2004. The restrictive policy also aimed to take control of growing cases of corruption by its officials who ‘transfer’ their monies into the territory with a clear purpose. Since then, Chinese government has continuously monitored the situation in Macau, especially on its impact to Guangdong province (next to the territory).

 

As at to date such restrictive measures have been further adjusted to impose more limiting rules for mainland Chinese traveling to Macau, including via Hong Kong. Now on average mainland Chinese could only visit Macau once every three months and stringent on multiple business-trip based on the free individual travels (FIT) scheme. Junkets and mass visitors are affected alike.

 

It is interesting to try interpreting the Chinese government’s long-term intention for this Macau phenomenon. My take would be,

l          The imposed restrictive policy for mainland Chinese traveling to Macau will stay as a long-term control measure. The ‘tap’ may open slightly or tighten up depending on Macau’s social economic factors and ongoing development.

l          The abovementioned ‘No chopping of an arm (for Macau), but blood-transfusion’ approach seems to be highly indicative of what the Chinese government’s baseline.

l          The free & easy management approach would not be suitable for Macau in today’s circumstances; proven by increased unhappiness and frustration of its population, through open demonstrations and marches on the streets. Mass and vip gaming activities that impact on the society will continue to be tightened up, especially junket operations that extend their network into mainland China.

 

Guangdong’s Shift in Its Economic Platforms

 

The re-charting of Guangdong’s economic development blueprint is a major milestone for Southern China region. Essentially, Guangdong is planning to transform its major economic activities from a low-cost manufacturing region to a higher value-add base. Instead of overwhelmingly relying on exporting to the Unite States and other parts of the world, Guangdong will evolve to be an economic prime-mover for neighboring provinces, emphasizing on services and capital market revamp. The long pending cross-sea bridge that links Hong kong, Zhuhai and Macau will be part of this grand 9 + 2 Southern China region initiative.

 

What does all these means? I would attempt to contribute my thoughts on a strategic map in the context of Asia’s Las Vegas – Macau. With all that has been mentioned with regard to Macau’s growth potential, let me put in perspective as follows.

 

l          That Macau SAR would not be allowed (by Central gov.) to steer its development, fully based on casino investors’ interest and profit margins. First thing first, Macau is to serve a noble goal of One Country – Two Systems.

l          That the current state of VIP/junket gaming business (65% of total gaming revenue) in Macau will come under greater control & restrictions by the Chinese government. Overwhelming junket activities and market share (huge credit and illegal transactions etc.) will ultimately destroy the much needed stability of Guangdong province, at the door step of the territory. Especially when Guangdong is in the shift in its economic platforms and moving towards developing a sustainable capital market mechanism to fund new businesses, in the province and also, Southern China 9 + 2 region. When push comes to shove, something has to go. As a matter of fact, junket operation is becoming more and more difficult in Mainland China under surveillance, coupled with increased credit risk. (Unless casinos are willing to share the risk).

l          It was reported that at least 10,000 or more factories in Guangdong has packed up and called it a day with more to join in the line. The next few years will see Macau’s VIP gaming revenue continue to be greatly affected. Personally I would think that the 19% drop in the 1^st quarter 2009 for VIP Baccarat revenue is still not the bottom pit yet.  

 

Some Singaporean friends who asked me whether the Singapore IR would flourish in VIP gaming business because of Macau’s huge success in the high-roller business apparently and coupled with Singapore IR’s low gaming tax regime. 

Seriously speaking, VIP gaming (or VIP Baccarat some like to call it) growth equation is heavily weight on the two Cs, namely Credit & Collection (risk). While those in the Asian casino industry would clearly know that non-negotiable chips rolling program remains highly volatile business for casinos. To mitigate such high volatility, casino has to achieve consistent high turnover in VIP gaming business.

Even with a much lower tax regime, junket commissions will still go up to take a big chunk of win. The logic is simple enough, junkets have to continuously fuel the credit portion (to players) in order to maintain consistent high turnover every month. So junkets’ credit risk starts to mount over time, unless the junket has superior collection power, then someday and someone has to compensate his risk exposure by giving higher and higher commission or sharing (a % of) the credit directly with junket operators. In order that casino can sustain VIP business through consistent high turnover. (Those who manage VIP gaming would know what I mean, the theoretical win for non-negotiable rolling chips is as low as 2.7%, in reality, that is not too far from that).

Same for direct high-rollers, if casino does not provide chip credit facility after sometimes, then out they lose the players (to competitors or to the junkets willing to provide credit facility). So the equation is simple as that.

 

Singapore is not Macau; just like Macau is not Hong Kong. Each has its own advantages and limitations imposed by external environmental factor, social economic (& wealth distribution), policies and culture. I could only try to speculate, that Singapore IR will have to seek survival on mass market margins in the gaming arena.

Is there anything wrong with that?

 

 

What’s new in Singapore IR…

 

 

What We Need To Know?
– by Expert IR

I read the ST news article published on 14th Apr 2009 (Page B2) that writes about apparent fear of Singaporeans losing out job opportunities in the IRs.

With my experience (at senior management level) in the opening of international casino-resorts in the largest gaming hub in Asia, I would like to share some thoughts with people who are concerned with job opportunities in the current economic downturn and for Singaporeans who aspire to ‘bet’ their career with the IRs.

To be rather simple in nature, I would identify a few key points in relation to the news article that speak about Resorts World Sentosa (RWS) hiring of Filipinos (in big quantity as reported) for discussion as follow:

(1) Why Filipinos? As we are aware, there is large population of Filipinos working overseas in many sectors, including but not limited to hospitality, gaming, health care, IT, financial sectors etc. They are very adaptable in different environments (including wages, though there is a minimum wage standard imposed by the Philippines authority) and speak English. Therefore, Filipinos are not new to working in casinos all over the world. In newly opened casinos especially, it is prudent to have adequate number of dealers and supervisor with experience on the floor. This is to ensure the casino floor is operated with sufficient level of efficiency and also, for risk management purposes (prevent cheats, etc.)
The question is, can Singaporean fresh dealer trainees be trained within a reasonable timeframe and be proficient on the job? The answer is yes.
Singaporeans are not inferior to other Asian populations, and if Macau could adopt the practice of all casino dealers must be hired from the local population, then Singapore IR can survive with that too. But to be objective, at least 2/3 of dealers can be Singaporeans for a start. Unless Singaporeans do not prefer to take on the job as dealers (due to whatever reasons), then a higher ratio of foreigners becomes justifiable. Such practice has to be transparent so that people out there would not speculate and generate unnecessary ill-feelings.
Same logic should also be applied for theme park and other service elements in the IRs. While the operators of the IRs need to maintain a level of experience/competence in each area of their staffing, so that quality service and standard of operations are achievable. On the other hand, Singaporeans should be given fair chance to be evaluated in all aspects of IR including non-gaming facilities. I am very confident that most Singaporeans will meet requirements and many of them can be trained to perform proficiently. Therefore, well-developed training regime is a must.

(2) Cost Structure. We don’t have to debate over the EBITDA margins that the IR operators need to produce in order to be sustainable after opening. Bearing in mind the high capital expenses/costs (& loans) for the investment, the IR operators need to consciously maintain viable cost (i.e. low-cost) structure (staffing, operations, Junket commission, rebates, costs of good sales etc.) throughout their pre-opening to the post-opening business operations. Therefore, Singaporeans should focus on the job/career opportunities first and not too fussy over a big & comfortable remuneration at this point in time. The golden days of “If you build it, they will come” scenario might not happen anymore. When the IR operators fail to maintain a ‘sustainable’ staff cost structure from hiring of qualified local population, they will turn to foreigners who are willing to adjust and adapt. So, Singaporeans must not provide the “push” factor to the situation.

(3) Responsibility of IR Operators. One of the key responsibilities of the IR operators should be to establish human resource plans that encourage the promotion and upgrading of locals knowledge and skills on the job; to create an environment that rewards performance and competence. In some cases such HR policy remains a lip service. Macau government has therefore put in place a policy to ensure that casino operators consciously identify able local staff to be promoted in due course and statistics are sent to the authority. Hiring of foreigners therefore would be ‘balanced off’ based on whether the operator has put in effort to groom locals (as well as other relevant factors involved).

(4) Prevent The Fallouts. The Singapore IR initiative took a very deliberate process of public debates and is an integral part of developing Singapore’s new tourism landscape, amidst highly competitive regional tourism backdrop with Taiwan, Vietnam, India and Guangdong etc. moving into the same game. Therefore, the IR’s long-term sustainability is not just based on new hardware development and financial means. The IR needs to be a complementing factor to the travel trades & transportation industries, fuels the human resource development landscape in order to maintain an overall high level of excellent service quality. And time is not in our hand when others are also preparing for the fight of tourism market shares.
As we go down this path with a bold stroke, we also need to think beyond just the $100 levy & the hard rules in perspective but how we could operate a crown-jewel of tourism attractions and yet sustained by high standards of services – with a right mix of local and foreign talent pool.
It is hoped that the IR operators NOT to opt for the strategy of fast and easy way just to open up casinos and hotel rooms in quick time, try solely to make money from casino operation coupled with lowest-cost possible labour force (supported by large quantity of foreign workers). If that happens, then we can understand why many prospective, qualified and aspiring (of them many are trainable) Singaporeans will be disappointed and, start to question about the objectives of going ahead to build casino-inclusive IRs.

IR operators would avoid being short-sightedness and they should take the opportunity to help remove fears of Singaporeans who think that the IR only hire locals for drivers, cleaning ladies, tea-ladies, waiter/waitress and other basic service jobs; IR operators should convince Singaporeans by clear & positive action but not just sounding out repeated PR words. Community support and good relations with locals remain key success factors especially for casino-resorts to sustain and grow in new markets. Social harmony must be observed in such cases, be it in Macau, Las Vegas, Singapore and other parts of the world.