Cotai's Next Wave
Cotai’s future landscape is taking shape, with construction beginning on Phase 2 of Galaxy Macau and Wynn Macau’s land grant application finally receiving approval. It’s not clear who will get the go-ahead on Cotai next, however, as government appears to want to stagger development in an effort to rein in a red-hot gaming industryMonday, 21 May 2012
With Wynn Macau’s Cotai land concession contract receiving official government approval on 2nd May, the big question now is which other operator—SJM Holdings or MGM China—will get the green light this year to build on Cotai and which will be left waiting.
In February, the director of Macau’s Lands and Public Works Bureau, Jaime Carion, indicated his department would likely approve just two of the three Cotai land grant applications during 2012. Following that announcement, Union Gaming Research Macau’s Grant Govertsen succinctly spelled out each operator’s case in a research note:
• “MGM China – In our opinion, MGM China can make at least three arguments as to why they should be included as one of the two operators to receive approval for a Cotai project this year. First, the company has the smallest amount of gaming supply in the market; second, the company has no exposure to Cotai; and third, the company’s concession expires in 2020, which is two years prior to four of the other five operators.
• “SJM Holdings – Like MGM China, we believe SJM can also make at least three arguments for 2012 approval of their Cotai land application. First, the company has no Cotai exposure; second, the company submitted its Cotai application before MGM China; and third, the company’s concession also expires in 2020, which is two years prior to four of the other five operators.
• “Wynn Macau – Again, we can think of at least three arguments that Wynn Macau can make as to why they should also receive Cotai land approval this year. First, the company has no Cotai exposure; second, the company submitted its Cotai application before any other operator; and third, the company has the second smallest amount of gaming supply in the market.”
A day after the Wynn announcement, MGM China Holdings announced its first quarter 2012 earnings (in conjunction with those of its parent company, MGM Resorts International), in which it stated: “We continue to put in a lot of effort on our Cotai project to refine and enhance our design along with simplifying the constructability and development costs. We believe government approval of our land grant application is imminent.”
The media honed in on the word “imminent” to speculate that MGM China could be next—or at least it has reason to be confident that it will be. The Las Vegas Review-Journal noted: “The language used by company executives during a quarterly earnings conference call surprised analysts because MGM Resorts officials have normally been somewhat reserved in their thoughts about Cotai.” However, beyond commenting that “the Wynn announcement has now cleared the air,” MGM China Holdings CEO Grant Bowie offered no concrete basis for the company’s belief that its approval was more imminent than that of SJM.
The only thing Wynn Macau’s approval definitively proves is that the earlier expiry of the concessions of both MGM China and SJM is not enough of a consideration to prompt the government to fast-track their approvals. That could be because it is highly unlikely the government will fail to renew any of the six operators’ concessions on expiry.
The deciding factor between SJM and MGM China, then, will be whether the government approves the applications on a first-come-first-serve basis or opts to favor the underdog with the smallest gaming capacity.
Some suggest the government may be reluctant to approve SJM first for fear of being accused of siding with the well-connected market leader. Equally, though, in order to escape criticism of deliberately handicapping the erstwhile monopoly operator, the government may simply continue approving the applications in the order they were received, which would mean SJM would follow Wynn Macau.
Odd one out
Cotai Reaches New Heights
At the 11th April opening of Sands Cotai Central—comprising Conrad and Holiday Inn hotels, as well as Shoppes Cotai Central—Las Vegas Sands Corp. and Sands China Ltd. Chairman Sheldon Adelson spoke animatedly to the assembled crowd of media, VIP and members of the public about his new three-tower Cotai centrepiece.
Mr Adelson proclaimed: “The Cotai Strip is the largest tourism project on the planet. And it all began with a vision that started with a reclaimed area of sand and mud and has arrived to where we arenow—one giant step closer to establishing Macau as one of the world’s top leisure, entertainment and business destinations. People said it couldn’t be done; but we have shown that nothing is impossible.”
The lofty ambitions of the new property were embodied by the sky walkers 500 feet overhead, carefully crossing the 1,700-foot distance across the Cotai Strip between Sands Cotai Central and its sister property, The Venetian Macao, while balancing on a wire less than one-inch thick.
There is one more Cotai project not covered by Mr Carion’s pronouncement on Cotai land grants. That is the Studio City project, which technically has a land grant but remains in limbo until the government approves gaming on the site.
The long-delayed Studio City had been held back for years by a protracted dispute between some of the project’s former partners—whom Melco Crown Entertainment bought out last June. Melco Crown took a 60% stake in Studio City and announced the project would include 300-400 gaming tables and 1,200 gaming machines. Then, Secretary for Transport and Public Works Lau Si Io pointed out that no casino was included in the project’s 2008 development plan. According to an article in Macau Daily Times: “The 2008 development plan of the project has never been made public and the last plan unveiled in the Official Gazette dates to 2001. Back then, the land concession contract set that the Cotai project included film production studios, restaurants and residential units, but no gaming amenities.”
Although the site has not yet been formally zoned for gaming, it’s difficult to see how any resort or tourism scheme in Macau of comparable size could be viable without a gaming component to it, and Melco Crown is awaiting approval to include a casino at Studio City before it recommences construction. The government’s original deadline for the project’s development was 2013. At this point, it seems unlikely Studio City can be built before then, though it would be extremely surprising if the government were to deny the site to Melco Crown after the deadline passes.
Melco Crown Entertainment is also evaluating the next phase of its development plan at City of Dreams. The company states in its latest annual report: “We currently expect the next phase of development to include a hotel featuring either an apartment hotel or a general hotel and anticipate we will finance this phase separately from the rest of City of Dreams.”
Melco Crown admits the project remains vague: “As of the date of this annual report, the next phase of development of City of Dreams is at a preliminary stage without any definitive plans regarding design, capital commitment, construction schedule or budget.”
Galaxy goes first
Galaxy Entertainment Group required no approval at all to commence development of Galaxy Macau Phase 2, and on 26th April announced it had already started foundational work on what will probably be the first new property of Cotai’s next wave. The last property of the first wave was unveiled earlier in the month—the first phase of Las Vegas Sands Corp’s sprawling Sands Cotai Central, which is set to be completed next year, when it will boast a total complement of 5,800 hotel rooms and suites, 1.2 million square feet of meetings and convention space and 300,000 square feet of gaming space.
According to GEG, Phase 2 will cost approximately HK$16 billion (US$2.1 billion) and virtually double the size of Galaxy Macau to 1 million square meters. That accounts for roughly 50% of GEG’s total contiguous Cotai parcel (which comprises the biggest land bank on Cotai at 2 million square meters), leaving plenty of room for further development.
Phase 2 is scheduled for completion inmid-2015 and key features include:
• Two new luxury hotels, including The Ritz-Carlton’s first ever all-suite hotel and the world’s largest JW Marriott, for a total of 1,300 additional rooms and suites and a property-wide grand total of more than 3,600 rooms and suites across five luxury hotels;
• Expanding retail space to more than 100,000 square meters and more than 200 stores;
• Increasing meeting, event and banquet space to a capacity of more than 3,000 guests;
• Enhancing the world’s largest sky- top wave pool with additional leisure amenities and lush tropical gardens;
• Expanding gaming capacity by up to 500 tables and more than 1,000 slots;
• More than 45 new food and beverage outlets for a grand total of more than 100.
GEG currently has about 500 workers on site carrying out piling work. According to Union Gaming Research Macau, “Given the head start as the first of what should be six new Cotai IRs (one for each of the concessionaires), the availability of labor should be less of an issue for Galaxy as it might be for other operators.”
Mr Govertsen also believes “the normal build cycle of approximately three years will give Galaxy Entertainment that much more time to hone its mass-market operational skill as it readies a significant amount of mass-market supply in the form of Phase II.”
At the Phase 2 announcement, GEG’s chairman, Dr Lui Che-woo, commented: “We have decided to accelerate the rollout of Phase 2 based on the success of Phase 1 and to align the opening of Phase 2 with the completion of major infrastructure developments in the greater Macau region in mid-2015. These developments will serve as a catalyst for future growth and diversification of Macau’s tourism and leisure market.”
Dr Lui added: “Galaxy Macau will benefit from increased visitation to Macau as major new infrastructure developments in China improve its accessibility, including the expansion of the border gates in Macau and Zhuhai, a high-speed railway network, completion of the ferry terminal in Taipa, a super highway between Guangzhou and Zhuhai and the construction of the Hong Kong-Zhuhai-Macau Bridge, among others.”
GEG plans to fund Phase 2 through a combination of existing cash, cash generated from operations and debt, and does not intend to issue new equity.
What next for Wynn?
Following news of Wynn Macau’s Cotai approval, Stephen A. Wynn, chairman and CEO of Wynn Resorts, gushed: “The official transfer of real estate in Cotai makes possible the commencement of the construction phase of what will be the single most important project in the history of Wynn Resorts.”
Mr Wynn continued: “We are mindful of our responsibilities to the citizens and government of Macau and we will remain consistent to the history of our organization by bringing to life a hotel resort in Cotai that will mark a new standard of elegance in the world.”
Although Wynn Macau’s land concession contract has been given the go-ahead, it still has several government applications pending, such as for the design of the property. Mr Govertsen suggests such approvals are a way to stagger development to ensure there is a reasonable gap between major Cotai property openings, noting, “These approvals could take up to one year, although we suspect a more likely time frame is several months. This would give Galaxy Entertainment a many-months head start on its Galaxy Macau Phase 2 relative to Wynn Macau’s Cotai property.”
Mr Govertsen adds: “Contrast this to recent commentary from MGM China, which is imminently anticipating a draft land concession from the government. It took Wynn Macau seven-plus months to have its Cotai land gazette following receipt of its draft land concession in September 2011. As such, we wouldn’t be surprised that if MGM China (and presumably SJM Holdings) were to receive draft land concessions in the near term, that the land wouldn’t be gazetted until sometime in 2013. This could easily push the start of construction to mid-2013 or later for MGM China and SJM Holdings, or about one full year after Galaxy Entertainment and Wynn Macau.”
Wynn’s Cotai plot spans 51 acres (approximately 206,000 square meters) and is expected to cost at least US$3 billion. The resort, featuring about 2,000 hotel rooms and 400 gaming tables, is likely to open sometime in 2016, said Deutsche Bank gaming analyst Carlo Santarelli in a note to clients. Mr Santarelli pointed out the Cotai announcement was “a meaningful positive for Wynn as it provides a much-needed growth story and likely alleviates concerns over other popular Wynn-related topics right now.” Chief among those topics is the ongoing legal dispute between Steve Wynn and the company’s co-founder, Japanese tycoon Kazuo Okada.
The 400 tables are also not guaranteed, and Wynn Macau will need to separately negotiate a table games allocation from the government during the development stage of the project. Mr Govertsen expressed optimism that Wynn Macau would get the tables it seeks: “We continue to believe that the government’s table cap scheme is somewhat flexible and subject to interpretation, grandfathering and possible exceptions/waivers based on prevailing supply and demand trends and other undefined factors. As such, we are not concerned that WYNN will not receive an appropriate table games allocation.”
Late to the race
MGM China Holdings’ Cotai project calls for 500 tables, 2,500 slots, 1,600 rooms and a budget of approximately HK$15billion-$20 billion (US$1.9 billion-$2.6 billion) to be spent over a period of 36 months.
The company has applied for a site of approximately 17.8 acres (72,000 square meters)—about one-third the size of Wynn Macau’s Cotai site. MGM expects to finance its project through cash flow and a credit facility.
SJM has earmarked two sites for development on Cotai—one adjacent to Wynn Macau’s site and another smaller site next to Studio City (as pictured in the map above). The 70,000-square-meter site currently under consideration is the one next to the Wynn Macau site. SJM’s plot size also pales beside that of its neighbor and seems especially small compared to the 2 million square meters on which Galaxy Macau sits.
SJM Chief Executive Ambrose So claims it could be a blessing for his company to plant its flag on Cotai after its competitors. “Being the latecomer we have the advantage of knowing what can be done and what cannot be done, what is successful and what is not successful,” he said.
Although Dr So has recently avoided commenting on when his company’s land grant might be approved, he was quoted by Portuguese-language newspaper Hoje Macau as saying his company has already submitted to the government a draft master plan for a project costing around 15 billion Macau patacas (US$1.9 billion). Dr So added that SJM is in a position to finance the project with cash flow from its existing operations.
The Lands and Public Works Bureau claims it is only able to approve two Cotai projects this year because of manpower constraints. Mr Govertsen postulates, however, that the real reason is to intentionally stagger the timing of future development.
Mr Govertsen does concede that it is “possible that the bureau truly is overwhelmed by the application process, not due to a lack of manpower, but rather due to shifting casino development scopes. Given the high stakes, we can certainly envision the operators continually enhancing their proposals to include amenities (e.g. room counts and types, amount of expected local employment, scale of non-gaming attractions, total dollar investment, etc.) perceived to be the most likely to result in first approval.”
The government has imposed a citywide cap on the number of gaming tables as a means to manage the growth of the local gaming industry. Political reality, however, precludes that cap being enforceable unless the government also implements an unstated policy to stagger development on Cotai.
Macau’s casino operators plan to invest heavily in non-gaming amenities at their planned Cotai resorts, furthering the government’s aim of diversifying the local economy away from its dependence on gaming. The current reality, though, is that the expanding array of entertainment, lodging, retail and dining offerings found on Cotai is either highly subsidized by gaming revenues or primarily patronized by wealthy gamblers. The prevailing view of industry sources spoken to by Inside Asian Gaming echoes Mr Govertsen’s belief that the Macau government will be flexible in interpreting the table cap and offer exceptions and waivers to Cotai’s upcoming integrated resorts to ensure they are financially viable.
Following the opening of Sands Cotai Central last month, Macau is already near the 5,500-table cap set to run through to the first quarter of 2013. After that, the cap will increase by 3% per year for at least a decade. That translates to 165 new tables in 2013, 170 in 2014, 175 in 2015 and 180 in 2016 (for a total of 6,190 tables by the end of 2016).
Assuming Galaxy Macau Phase 2 and Wynn Cotai get their expected table allocations and open on schedule, no other projects open in the meantime, and no tables are reallocated from other properties, that would require breaching the cap by more than 200 tables in 2016. If either MGM China Holdings or SJM also manage to open by 2016, the table cap would be completely blown, and the industry’s growth would become unsustainable according to the variables the cap was designed to control (from mitigating the strain on Macau’s infrastructure to placating the central government in Beijing, which wants to limit the large sums its citizens are losing in Macau).
Operators developing costly Cotai projects are no doubt counting on the Macau government to allot them sufficient gaming tables in order to run profitably. Loathe to tarnish the city’s recently won reputation for providing strong returns on resort infrastructure, the government has therefore turned to a strategy of staggering development on Cotai as the most practical approach to keeping growth at manageable levels.