Galaxy will fire the starting gun for its Cotai integrated resort when market conditions are right, says Francis LuiMonday, 16 March 2009
Francis Lui, Vice Chairman of Macau casino operator Galaxy Entertainment Group, is not a man to be rushed. He has the height, bearing and sartorial style typical of a member of Europe's old patrician classes, combined with an essentially Chinese type of calm and courtesy toward guests. The grand pronouncements and swagger traditional in some quarters of the Las Vegas casino scene are not really his style.
Yet when Mr Lui discusses the future of Galaxy's integrated resort on Cotai, which was originally due to open in the third quarter of this year but has now been slowed to an as yet unannounced date next year, he does borrow from the language of the West—the Wild West.
"If we feel the market is coming back, we can pull the trigger. Conservatively we can get Galaxy Macau, our resort in Cotai going in less than a year—probably within nine months," asserts Mr Lui.
"We don't want to open a big property in Cotai while facing the current headwind. We would definitely prefer to have the wind at our back."
Brickbats & bouquets
In the past 18 months, Mr Lui and his board have received a few verbal blows aimed by analysts and the media regarding GEG's approach to its Macau operation.
This publication has been among those querying Galaxy's strategy in the territory, and the execution of that strategy. Was Galaxy aggressive enough in capturing market share in the VIP sector at its flagship StarWorld Hotel & Casino during the boom time of late 2007 and early 2008? Will Galaxy have enough money to finish its Cotai integrated resort?
Mr Lui listened patiently and politely to these and other questions when Inside Asian Gaming spoke to him and to Bob Drake, a former Vice President of Finance for Harrah's Western Division in the United States including Las Vegas and now Galaxy's Group Chief Financial Officer. The interview took place in the plush surroundings of the Cigar Lounge at StarWorld.
The occasion and the mood were entirely in keeping with Mr Lui's low-key approach. He could be the only Macau gaming mogul to keep an Octopus card—the electronic wallet ticketing system for Hong Kong public transport—in his own wallet. Galaxy says the majority of its StarWorld customers come from Hong Kong and Mainland China. Keeping in touch with every segment of the market appears to be a keynote of Mr Lui's and Galaxy's approach.
"The five-star hotel market is a great market, but there's also a great market in appealing to another tier of customer," says Mr Lui.
"With our integrated resort structure on Cotai, we will be able to cater for first tier customers at our Banyan Tree and Okura Hotels, but we also have 1,500 rooms catering for a second tier market. We feel there's a gap that we can fill successfully."
A Chinese perspective
It appears this is not merely mood music to suit recessionary times. Like Dr Stanley Ho's casino operating company SJM, Hong Kong-listed Galaxy was founded and is run by Hong Kong Chinese entrepreneurs who appear instinctively to understand the roller coaster boom-bust tendencies of the local economy. Those tendencies apply regardless of any global credit crunch. This understanding of the local fundamentals tends to create a management style that believes in incremental steps and moderate gearing on debt, and chooses not to be seduced or flattered by the peaks and troughs of the market.
"Four or five years ago, when I started the business here, people asked me: 'What do you use to measure your performance?'" says Mr Lui.
"At that time, a lot of people assumed market share, or revenue, or EBITDA [earnings before interest, taxation, depreciation and amortisation] or EBITDA margin. But I always said no, it should be based on ROI—return on investment," he asserts.
"We're definitely in the gaming business, but we're not gamblers," adds Mr Drake.
"I remember the days before the credit crisis when people were pushing money toward us saying 'Take the money,'" continued Mr Lui.
"'Use the money and try and maximise your building programme,' they said to us. We said 'No thank you'. We need to feel the demand is there before we start building," he explains.
Personal modesty and caution in business should not, however, be mistaken for reticence or passivity when it comes to leading Galaxy Entertainment Group through the challenging times of a global recession or being willing to take tough decisions for the sake of the future success of the company.
"We always try and expand within our means. That doesn't mean we are not aggressive. We are very aggressive," states Mr Lui.
"But it means that realistically we don't go beyond our means. We have a very strong balance sheet with over HK$5 billion in cash, which we strengthened recently with our bond buyback program. So we're in a safe, comfortable position right now. Do we have any pressure right now? The answer's no. We're very fortunate to be well capitalised."
Mr Lui is upbeat on the point recently raised by Deutsche Bank—that Galaxy's decision to buy back bond debt could leave it short of cash for Cotai, especially given current credit market conditions.
"Deutsche Bank was saying we need to raise financing to do this and that, but the answer to that is of course we do, now that we have bought back some of the debt," explains Mr Lui.
Cash is king
"Of course, a replacement loan would have to be in place for us to finish off what we have started after we had the opportunity to provide liquidity for some bond holders. We're also reducing our overall debt by redeeming our debt at a 50% discount. In the meantime, we also save approximately 8 to 9% per year in interest. It was a great deal for any investors who wanted the cash back."
"We retired US$170 million in debt at a cost, in round numbers, of US$86 million, and we saved approximately US$40 million in total interest," adds Mr Drake.
"It's a win for us obviously from our capitalisation standpoint. We have de-leveraged the company, so our risk profile has changed, and at the same time the people who tendered, tendered for a reason, so it must have been a win for them also."
"Do we need fresh capital to complete Cotai?" asks Mr Lui.
"Yes, especially now we have gone about buying back bonds. But we felt that with a stronger balance sheet, with the cash flow coming in, and an extra year and half cash flow coming in from StarWorld, plus lower construction costs, it would put us in a very comfortable position," he asserts.
"StarWorld is also generating positive cash flow nicely and can contribute to the funding of the overall project," adds Mr Drake.
"With the state of the construction industry, we can see already that our construction costs will be less, so when you also factor StarWorld's healthy cash flow for a longer period of time along with construction cost savings into our overall cash flow, it actually turns out to be a better proposition for us," concludes Mr Drake.
The idea of shareholder value and of allowing investors access to liquidity is a recurring theme for Mr Lui and Mr Drake. Those ideas are as reasonable and unobjectionable as the concepts of motherhood and good apple pie. So is it anything more than rhetoric?
"Ultimately, you'll be judged on whether you make money for your shareholders," says Mr Lui.
"My primary focus is ROI, not how much EBITDA you generate. I don't want to risk too much. You are not dealing with a small business here. You are handling billions of dollars, and you have to feel responsible. For us to be pushing all the way and maximising leverage is not the way forward for us. Of course, if you use that approach and everything works out for you, you could make a lot more money. But I live in a realistic world, not a perfect one."
The operative word when Mr Lui discusses the Cotai project is 'will'. So when will the company's Cotai project actually open?
"We would like to answer that question closer to the end of this year," smiles Mr Lui.
"The reason is that we would like to keep an eye on what's happening this year first before making such an important decision. This year's going to be a very turbulent time, and so many things could happen overnight. For us to be fixing a date and being committed to opening regardless of market conditions is not a wise thing for anybody to do. By the end of the year we hope we will have seen a market recovery. Then the decision will be easier.
"We want to go ahead and finish Cotai, there's no question about it. We certainly have enough confidence in Macau to believe that the market will recover. We are just saying that we need to see the market improving. When there is a sign of that, we will build, because we believe if the market improves then the liquidity will be available," adds Mr Lui.
"We will probably still finish the exterior—the façade, the curtain wall, the cupola on the top and so on—this year," he explains.
"Our schedule is that we're going to do it by the end of the year. At that time everything should be finished apart from the interior fittings. That was for cost reasons. We believe if we delay the tender right now we can save a lot. The second point is that once you install the interior you have got to start using the property, otherwise the fittings will deteriorate.
"A majority of the drawings and the tender documents are already on the shelf, so if we feel the market is coming back, we can pull the trigger. Conservatively, then we can get it going in less than a year—probably within nine months," he states.