Can Galaxy (Casino) Resort Remake History?

Posted: March 26, 2011 in Uncategorized

Editor:  We post Mr. Malibu’s commentary on Macau mega resorts in Professional Ground Decoder for readers who are keen to know what’s the latest development there.

Raising the Stakes: Win or Die

Commentary by: Jackson Malibu (Hong Kong)

26th Mar 2011

RECEIVED a quick delivery of The Edge Singapore latest issue sent over from the Lion City, an article talks about the Lui family’s entry into Macau casino ring as well as now the family is betting on their latest venture in the territory – Galaxy Mega Resort in Cotai Strip.

The Galaxy Entertainment Group is relatively ‘unknown’ in Macau and less talked about by investment analysts. The reason is simple: The group’s only surviving business currently is the StarWorld Hotel & Casino on Macau main island. It has been turned into purely (almost) a junket rooms landmark rather than a balanced casino combined with healthy mass market (higher margins) gaming business. Such a junket den is viewed by experienced casino analyts as a non-competitive casino ‘outpost’ in the sea of big boy arena, though it remains one of the 6 casino licensees in Macau.

It was reported that StarWorld Casino’s revenue stream though looks impressive on facial value with high junket business turnover, however the business comes with very high operating costs basing on the cut-throat 40-25 split between the strong junkets and casino. This is the type of revenue shares behind the secene:

– Junket room operators take a commission of 40% (or more) of the wins from total turnover base of VIP baccarat.

– Another 25% of bonus (to certain junket operators) coming from addition performance base of that month.

– Junket operators pay rents and provide credits to their players.

– Government gaming tax reginme is close to 40%!

– As a guide, the casino only get about 12 – 15% (at best) of the win from total turnover of revenues of VIP baccarat.

If it is based on another version of business mode – fair share of win & loss, then the casino concerned will have to bear some percentage of credits exposure.

Under such condition of operations mode, it is quite a huge financial burden for GEG (Galaxy Entertainment Group) to proceed on its opening of Cotai mega resort this year. In fact, the opening dates of GEG’s mega resort have been rescheduled for probably more than 5 tinmes over the past years.

Keen-eye analysts would tell you that GEG is coming close to the few hundred million USD corporate bond maturity date this year! Coupled with a private equity fund’s investment in the group. Last year, a new China ‘Tim-sum’ bond of HK$14b was taken up by GEG for its Cotai project. All in all, the group needs to turnaround this mega project (Galaxy Resort in Cotai) real fast with capability to capture huge market volume in order to secure the group’s future – Is a live or die situation if not too exaggerated.

But can GEG rally the market?

First thing first, Galaxy must NOT enter into the same scenario like what CoD (City of Dreams) had endeavoured. It is a disaster for CoD to take on American style of product mix with overly extended high-end luxury platform. Time and again it has been proven that the Southern China tourists coming to Macau are primarily mass market consumers. The rest, are just the other extreme of the market spectrum – Junket induced market. So, CoD get itself stuck in the Middle of Nowhere. It is a case in point that, today Cod has to heavily rely on junket mode of turnover (or churning) to survive. Analysts have realized that mega casinos like CoD that lack brilliant top management and robust operating systems (two most critical elements) will be in trouble, sooner or later.

On the opposite side of the competitive casino landscape in Macau, Sands China and Wynn Macau are the best example of why brilliant management and robust systems are so important to their success. Lisboa stays in the middle ground but with much comfort zone – no debt.

To sum it up, GEG is now ‘feet-wet’ in their further endeavour to open and operate the Galaxy Resort@Cotai. The group was reported not too long ago having their senior management staff including its chief operating officer and SVP marketing who dropped out of the race even before the horses reached finishing line!  One of the major hurdles for GEG since its inception, is that the group repeatedly failed to secure brilliant senior management team members from the industry. It is not surprising for analysts to see many of mediocre guys come and go over the past years. The latest rumor is that the current guy who is holding the fort might be jettisoned sooner than expected.

Notwithstanding, some industry experts are taking a more positive mindset on GEG’s big and risky bet this time round. The (positive) people whom I spoke to include a pioneering senior staff who had helped GEG to open StarWorld Hotel & Casino property successfully; this guy says, ‘we must not forget that in GEG the corporate envirnment is dynamic enough to cope with such frequent changes of senior management brokes. Key decision making stays with the family in particular, the vice chairman Mr. Francis Lui.’ He went on to credit the young Lui on the challenges ahead, ‘I would think that Francis is highly intellectual and he knows what’s going on but however, he might not be able to fully control who (the CEO or COO) he has to hire. The oldman still has the say on certain issues. But Francis is able to stay on top of things before something about to break, and he managed to run some winning bets of the horses, so far.’

The big question remains, but this is a huge bet (if not gigantic) the group is embarking on, either they remake history on Cotai Strip or they will be buried. The group’s critical success factors can be summarized as cost structure, margin push, brilliant leadership and build robust systems. The rest, as many analysts had said it over and over again, loud and clear: Go fight for the mass market ‘bridgehead’ and grow it with critical mass, stupid! Junkets are good friends but once they start to ‘run the House’ for you and you will be game-over sooner or later, in this mega resort arena.

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