Scientific Game

Apples to Oranges

Macau’s market share figures provide a misleading measure of SJM’s competitiveness

Monday, 28 May 2012 12:24
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SJM Holdings Ltd, Macau’s largest casino operator by revenue, said net profit in the first quarter of 2012 was HK$1.7 billion (US$219 million), up 22% from HK$1.4 billion in the same period last year.

The company’s gaming revenue for the first quarter increased 8.5% to HK$19.7 billion, lagging overall market growth of 27%. SJM’s share of total Macau casino revenue stood at 27% in the first quarter. This compares with a market share of 31.9% for the same period last year.

Purporting to offer insight on SJM’s steady market-share decline, media reports often conclude that the erstwhile monopoly casino operator is struggling to stay ahead of the new foreign competition. The market share figures do not, however, offer a true measure of SJM’s competitiveness, which should be measured on an apples to apples basis performance at casinos developed by the new operators vs. performance at SJM casinos built after the market was opened up. Instead, the market share figures offer an apples to oranges comparison; the oranges comprising an SJM property portfolio saddled with a large number of ageing and third-party-owned legacy casinos.

Although SJM operates 20 of Macau’s 34 casinos, 14 of those are owned by third-party promoters. These so-called satellite casinos contributed 51.4% of SJM’s total casino revenue in the first quarter of this year. The satellites pay SJM anywhere from 20% of the gross (the traditional 40:40:20 model, whereby 40% goes to the government in tax, 40% to the satellite owner and the residue to SJM), to as little as 3-5% to SJM on a profit-share basis. It is, therefore, grossly misleading to count all the revenues generated by the so-called satellite casinos towards SJM’s tally in compiling market share data. Although Galaxy Entertainment Group also has satellite operations, Galaxy’s satellites make a much smaller contribution to its overall earnings, especially following its major capacity expansion with the opening of Galaxy Macau on Cotai in May last year.

SJM’s satellite casinos are mostly located within modestly appointed hotels, but through a combination of long established networks and possibly a willingness to go after clients neglected by the bigger operators, are able to generate significant VIP baccarat volumes. In 2011, the satellite casinos actually held up pretty well against the market as a whole, reporting revenue growth of 34.9%, against the market-wide 42% increase. They are inexorably losing share to the glitzy new resorts, however, and will no doubt bear the brunt of any market downturn. The satellites got off to a disappointing start this year, reporting a 5% year-on-year revenue decline in the first quarter of 2012. On the bright side, because SJM only pockets a small portion of the revenue from the satellites, its overall profit has been less impacted by their declining fortunes.

SJM directly owns and promotes seven properties. The flagship, Grand Lisboa, is the only one that can be fairly compared with the new breed of casinos that have sprouted up in Macau since the May 2004 unveiling of Sands Macao. The others are a motley collection, including three slot halls, the iconic Casino Lisboa (which opened in 1970, and until Sands Macao opened in 2004, remained Macau’s gaming hotspot), Casino Oceanus at Jai Alai (a converted shopping mall) and the crumbling Casino Jai Alai (which shares the Oceanus license, keeping SJM’s total count of licensed venues at 20).

SJM treats Grand Lisboa as a category unto itself in reporting its financial results, with its other directly owned properties (termed “other self-promoted casinos”) grouped together as a second category, and the satellite casinos collectively making up a third.

In the first quarter of 2012, gaming revenues at Grand Lisboa were up 26% yearon- year, more or less in line with the overall Macau market. Of course, some of the 27% overall Macau market growth was generated by additional capacity at new properties that did not exist in Q1 2011, most notably Galaxy Macau. According to Union Gaming Research Macau, “on a same-store basis, we believe the Macau market grew by 16% year-on-year, suggesting that Grand Lisboa outpaced same-store sales by 1,000bps on a year-on-year basis.”

Grand Lisboa’s strong showing proves SJM is clearly capable of thriving in the face of competition. Unfortunately, the company’s satellites and other self-promoted casinos— the latter category saw a 5% revenue fall in Q1—will continue to drag down its market share, and SJM faces a likely wait of three years or more before it gets to open another major new property.

Arguably, cash-rich SJM should have been faster in developing new properties in light of the aggressive expansion plans of its competitors, especially now that its Cotai project is being held up by the government’s desire to restrain growth.

Although Sheldon Adelson’s famous “supply-creates-demand” view on Macau appears to have been borne out over the past few years, SJM’s perspective on the city extends far longer. SJM has taken a prudent approach to developing profitable casino operations in Macau for over five decades (first as STDM, then SJM following the 2002 liberalization), and concern about shifting monthly market shares are unlikely to persuade it to commit to investing in any project it does not believe offers a strong return.

Casino receipts at Macau’s glitzy new resorts continue to exceed expectations, but with a few notable exceptions, demand for the non-gaming offerings remains patchy and unpredictable. Even now, the survival of SJM’s older properties proves that for many big players, lavish surroundings and amenities are not essential. That is changing, however, as the new resorts strive to outdo each other, transforming players’ expectations of what constitutes an acceptable gaming venue. It’s a far cry from monopoly-era Macau, where pretty much all that mattered was having gaming tables.

SJM’s older properties may be declining, but they have long since paid for themselves and made handsome returns for their investors. They also cost much less to build than the new breed of casino resorts on Cotai, which are grandiose by necessity. The first batch of Cotai properties needed crowd-pulling attractions to woo players away from the action on the Macau peninsula. Now that the bar has been raised, they continue striving to outdo each other to draw traffic. Furthermore, in keeping with the wishes of both the local government and the central government in Beijing to diversify Macau’s economy, approval of any Cotai project implicitly requires the inclusion of a significant and costly non-gaming component.

Keenly focused on returns, SJM was understandably reluctant at first to rush into the Cotai fray. That initial reluctance has had the unintended consequence of delaying SJM’s arrival on Cotai even beyond the schedule dictated by its cautious approach to new development. When it does finally get there, though, the tables could well turn as SJM competes for market share on Cotai

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