A Tale of Two Cities
Taipa’s SJM-licensed casinos are underused, but SJM doesn’t mindThursday, 09 September 2010
In the red hot gaming market of Macau, the mass-segment live tables in SJM-licensed casinos in the ‘midtown’ zone, Taipa, appear to be significantly underperforming in revenue terms.
Some VIP players may find sufficient motivation to trek to Taipa, but mass-market customers are thin on the ground. In gaming terms, Taipa is something of a dormitory settlement no man’s land across the water from the Macau peninsula and on the way to Cotai.
The SJM-licensed Taipa casinos—Greek Mythology (New Century), Macau Jockey Club Casino and Grandview—between them have about 200 tables. That’s only just over 4% of Macau’s live table inventory, but nearly as many as there are in SJM’s directly managed flagship property, Grand Lisboa. Those tables could go a considerable way to boosting SJM’s profitability if at least some of the mass tables were reassigned to busier floors on the peninsula.
Taipa’s table inventory is an important resource, because the number of live tables in Macau has (in theory at least) been capped by the government at 5,500 until the end of 2012. There were already 4,828 of them out there in the market at the end of the second quarter of this year, according to Macau’s gaming regulator, the DICJ. What slim quota is left will be fought over by Galaxy and Sands China for their new Cotai resorts. Both those operators seem to be under the impression they have each been given an allowance of 400 new tables for the first phase of their Cotai projects. If phase one of Sands’ Cotai 5 and 6 opens before the end of 2012 as the company seems to think, it will create, to put it mildly, an interesting situation re: the enforcement of the table cap.
Sands has already indicated it may shuffle some of its existing table inventory around in order to populate Cotai 5 and 6. That highlights the fact table utilisation is patchy even in the most popular casino destinations. Variables affecting utilisation include day and time of day, the weather and seasonal factors such as public holidays. In Asia, table utilisation also depends on whether players feel that a particular dealer will be lucky for them.
In the end, however, audited results don’t generally lie. If a casino spends too much time with too many tables underused, it will show up on the balance sheet—especially in the Macau market, with its fearsome overheads. The annual government licensing fee on a mass market live table in Macau is MOP100,000 (around USD12,500) and a lot more for a VIP table. A dealer salary is around MOP13,000 per month (USD19,500 per year). And with nearly 40% coming off the top in government tax, you really need to make your Macau table assets sweat to make profits—especially in the game of choice, baccarat, with its narrow house advantage and volatile hold.
The evidence to support the proposition that SJM-licensed mass market tables on Taipa are under-utilised comes from a brief study of the Greek Mythology property.
The mass market prospects of Greek Mythology have essentially been overlooked by Ho family interests in order to ensure the success of next door Altira Macau, run by Melco Crown Entertainment (Nasdaq: MPEL), a company co-chaired by Dr Stanley Ho’s son Lawrence. Altira not only has MPEL’s own in-house marketing machine behind it, but also benefited back in 2007 from an injection of much needed junket roll from new VIP players. This was possible because MPEL was able to enlist the help of one of Greek Mythology’s shareholders that also has an interest in junket activity.
Amax Holdings, a Hong Kong-listed company, is a 49.9% shareholder in Greek Mythology, and from 2007 onwards earned, via its junket consolidator subsidiary, commission from Altira’s high roller business.
David versus Goliath
The 16 VIP tables at Greek Mythology actually overperform relative to next door Altira Macau, but the 100 mass-market tables at Greek Mythology bring the average down with a bump.
In its interim report issued in December last year, Hong Kong-listed Amax Holdings, a 49.9% shareholder in Greek Mythology, reported that in the six months to 30th September its portion of net win from the 16 VIP tables in the casino was HK$14.5 million. That’s equivalent to HK$906,000 per table for Amax’s share or HK$1.8 million per table for all the shareholders. Pro rata, that’s better than Altira’s performance. Altira managed HK$658 million net win across 210 VIP tables in the full year to 31st December 2009. That works out to HK$1.6 million per table.
But Amax’s share of Greek Mythology’s final profits for the six months to 30th September was only HK$1.97 million. That’s a relatively miserly (by Macau’s inflated standards) US$250,000 from 116 tables. One of the drags on Greek Mythology’s performance is likely to be the 100 mass-market tables. In IAG’s experience, they are often empty.
SJM could help out Greek Mythology’s shareholders by marketing the property to mass segment customers more intensively—or even a little. But it hardly does that even for the legacy casinos on Macau peninsula, with its more developed tourism transport links, so why would it do so on Taipa?
In overlooking the mass market potential of Greek Mythology in favour of chasing VIP table dollars, SJM and its associates have been absolutely true to the traditions and spirit of Dr Ho’s gaming operations. In that context, the mass market focus of the Grand Lisboa over on the Macau peninsula is actually an aberration and a break with SJM tradition.
In any case, Amax is getting compensated for the underperformance of the mass market tables at Greek Mythology by its involvement in a junket consolidation business feeding VIP players to Altira Macau.
The commercial incentive for SJM to involve itself in the details of running satellite casinos such as Greek Mythology isn’t strong, because it doesn’t own the full economic benefit of the revenues. Instead, SJM gets a share (traditionally 20%) of a satellite’s revenue in return for access to its gaming licence and in some cases for supplying floor staff.
Nonetheless, there are reasonable arguments in a table-capped market in favour of shifting tables from underperforming districts or venues and putting them in places with greater profit potential (such as the Macau peninsula). A publicly-listed Las Vegas gaming company would have its shareholders howling at the moon if it allowed too many precious Macau tables to lie empty and unloved for any length of time. In reality SJM would be unlikely to make such a demand on its affiliates.
The Chinese way
Even leaving aside contractual niceties, it’s not the Chinese way. The Chinese way—especially among medium-to large-sized companies such as SJM—is to share business interests with a network of collaborators. Although this carries the downside of having to share profits with others, it has a number of structural advantages. It can spread regulatory and financial risk, and create an exponential growth in the network of people available for business collaboration and favour-asking.
A great example of the spread of this SJM spider’s web of mutual interest is the rise of Ted Chan. Mr Chan went from Mocha Clubs (originally a Melco business under Dr Ho, passed on to Lawrence Ho when he took over at Melco and now part of MPEL) to become chairman of Amax, then to Altira as President and now as co-Chief Operating Officer of Gaming for the whole of MPEL.
The presence of those 200 or so SJM tables in Taipa also gives SJM and its friends coverage in the southern part of the Macau market. The Macau government’s position so far has been to restrict any further expansion of gaming in suburban areas. So the strategic benefit of SJM’s Taipa coverage is probably to provide a support network for marketing purposes should SJM finally take the plunge and sign up for its own resort on Cotai. The arrival of Macao Dragon’s ferry service into Taipa as a competitor to LVS’s CotaiJet could also provide SJM fresh marketing options for the mass tables. In any case SJM’s attitude toward Taipa is essentially that as the incumbent concessionaire it can afford to sit and wait. How very SJM. How very Chinese.