Scientific Game

Different Visions

What makes Asia’s most bullish casino resort developer loath to enter the Philippines?

Monday, 06 August 2012 16:18
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As Las Vegas Sands Corp. Chairman and CEO Sheldon Adelson reminded us ahead of the April opening of the US$4.4 billion Sands Cotai Central complex: “There were few believers in my vision for the Cotai Strip when the site was basically under water. With the completion of Sands Cotai Central, that same spot will be home to thousands of hotel rooms, millions of square feet of retail, meeting and convention space, dozens of restaurants and so many other attractions.”

Cotai was created by reclaiming land from the sea between Taipa and Coloane islands, adding a much needed 5.6 square kilometers to Macau’s land area, bringing the total to 29.9 sq. km. Most of Macau sits on reclaimed land—in 1912, its land area was a mere 12.7 sq. km.

Macau’s other casino operators had previously largely shunned Cotai in favor of the traditional gaming hub on the crowded Macau Peninsula, home to casino properties offering the essentials of a gaming trip— tables, slots, hotel rooms, restaurants, bars, spas and sometimes a smattering of highend boutiques—but not much else. Now, however, they are all clamoring to either secure or expand their presence on Cotai, where the action is inexorably shifting.

Unlike the Peninsula, Cotai offers sufficient space to develop sprawling resorts equipped with world-class non-gaming amenities. Those amenities don’t come cheap though, especially with operators vying to outdo each other in the wow factor stakes, and customers consequently becoming more demanding. Gone are the days when a Macau casino could pay for itself in under a year—LVS’ first local property, Sands Macao, which famously did that, only cost US$265 million to build and was essentially a glitzy box containing gaming tables, slots, high ceilings and a few high-roller suites. Still, if you are investing in a big resort, Macau continues to offer some of the best returns in the world. The US$229.2 million adjusted property EBITDA [earnings before interest, tax, depreciation and amortization] recorded at the US$2.4 billion Venetian Macao in the second quarter of this year far exceeds LVS’ expected 20% return on its projects.

 

Supply-Creates-Demand Thesis

Mr Adelson believes passionately that demand among Mainland Chinese for his product in Macau is insatiable, and as such, he desires to own and control as much of Cotai as possible. After unveiling the Venetian Macao as the Strip’s anchor property in August 2007, Mr Adelson kicked off an aggressive Cotai development plan (while simultaneously also building the world’s most expensive standalone integrated resort, Marina Bay Sands, in Singapore). Unfortunately, this left LVS over-leveraged and debt ridden as the 2008 financial crisis hit, bringing it to the brink of bankruptcy. The company’s woes were compounded by Beijing’s tightening of visa rules on Mainland Chinese wishing to visit Macau, which drove a decline in gaming revenues from September 2008 to the first half of 2009, ending an unbroken five-year run of spectacular growth.

LVS was forced to suspend its Cotai development, but managed to ride out the storm, as Mr Adelson extended a US$475 million personal loan to the company. Beijing eased up on the visas again, the company raised US$2.5 billion by listing it’s Macau operating subsidiary, Sands China Ltd, on the Hong Kong Stock Exchange at the end of 2009, the US$5.7 billion Marina Bay Sands was completed in April 2010 and became perhaps the most profitable casino property in the world, and LVS secured financing for and resumed construction on Cotai Plots 5 and 6 (Sands Cotai Central) in May 2010.

The wisdom of Mr Adelson’s bullish development strategy on Cotai has been called into question by the early performance at Sands Cotai Central, which arrives at a time when VIP gaming revenue growth is slowing, and has been accused of cannibalizing Sands China’s other Macau properties. Since the opening of Sands Macao in May 2004, every major new casino opening in the city has coincided with a spike in overall visitor numbers and gaming revenue, suggesting an unbroken trend of new properties growing the overall revenue pie, rather than cannibalizing existing venues. SCC may have ended that streak.

Still, it is too early to pass judgment on SCC. The second phase is scheduled to be unveiled in October, and the new amenities therein could well boost its appeal. Furthermore, given the lull in new property openings until mid-2015 or later (ahead of the second wave of Cotai resorts—Galaxy Phase Two, Wynn Macau, and whichever other projects get approved), SCC might provide much-needed capacity in the interim—both in terms of gaming and entertainment, as well as the inventory of 5,800 hotel rooms and suites it should have in place by early 2013. The mass market continues growing strongly in terms of visitor numbers and revenue, and some of that traffic will naturally head to SCC. Meanwhile, the VIP trade could well pick up as junkets and casinos increase their efforts to recruit new high-end players from both the major cities and inner reaches of Mainland China.

Sands China has been much more aggressive than any other Macau casino operator in developing non-gaming amenities. As SCC hits its stride following the phase two opening, it could emerge as “a game-changer for MICE in Macau,” says LVS President and COO Michael Leven. The combined room count and MICE [meetings, incentives, conferences and exhibitions] facilities of SCC, Venetian Macao and Four Seasons could help bring meaningful numbers of high-value business tourists to the city.

Before Sheldon Adelson became a casino magnate, he was known as the “Convention King” in recognition of his prowess in developing that industry in Las Vegas. Mr Adelson’s reputation in the field of conventions is believed to have been a deciding factor in the Macau government awarding him a casino license (while Steve Wynn secured his license thanks to his reputation for developing extravagant resort entertainment). The first step towards delivering on the convention promise was providing 100,000 square meters of MICE space at Venetian Macao. SCC clearly continues the mission.

It is unclear when demand for nongaming businesses in Macau will become significant, with retail showing the most potential. What is clear is that Sands China stands to benefit the most from an uptick in non-gaming demand, by virtue of having the most capacity in place to serve it.

What is also clear is competition is eroding margins in Macau, and SCC’s return on investment will pale beside that of Venetian Macao and Marina Bay Sands. The latter recorded adjusted property EBITDA of US$330.2 million in Q2 this year—although that figure was negatively impacted by a significantly lower than expected rolling chip win percentage of 2.42% in the quarter. In Q1, MBS had scored a whopping $472.5 million in adjusted property EBITDA—outstripping the $456.4 million adjusted property EBITDA recorded over all of LVS’ Macau properties in the same period. By comparison, the first phase of SCC, which began operations on 11th April, was open for 81 days during the second quarter, and generated $51.8 million adjusted property EBITDA in that time.

Scoring a Singapore casino license was a coup for LVS. Many feared the Singapore market would be unable to generate sufficient returns to justify the high level of investment needed to develop one of the city’s two integrated resorts. LVS paid almost US$1 billion just for the land on which MBS sits, and the resort had to be of a grand scale by necessity to accommodate a decentsized casino, owing to the requirement that gaming spaces occupy no more than 5% of the resorts’ total floor area.

LVS was looking to achieve a 20% return on MBS, but has done much better. Spurred by his success in Macau and Singapore, and driven by his bullish temperament, Sheldon Adelson is keen to expand elsewhere in Asia. He has been lobbying in Japan, South Korea, Vietnam and Taiwan for the right to build integrated resorts in those countries. He has also expressed his desire to establish a presence in India, and outside Asia is currently working on EuroVegas, a US$20 billion integrated resort project in Spain.

different_visions_okada

Going it alone—Kazuo Okada

Odd One Out

The one notable country not to make it onto Mr Adelson’s development wish list is the Philippines, where four integrated resorts are being developed by separate consortia on 1 sq. km of prime reclaimed land at Manila Bay. Sands China President and CEO Edward Tracy was recently quoted by the Macau Daily Times as saying his company has “no intention of investing in a project in Manila.” The paper added that according to official sources, Manila Bay “does not fit the company investment profile.” Apparently, not all reclaimed land is created equal.

Steve Wynn is similarly unwilling to get involved in the Philippines. Mr Wynn, of course, is currently in the midst of a bitter legal dispute with his longtime friend and business partner Kazuo Okada, with whom he had a falling out over Mr Okada’s decision to develop a casino resort in that country.

Mr Okada and Mr Wynn had traveled to the Philippines together in 2010 to explore the possibility of making an investment there, but Mr Wynn decided against it. Apparently, Mr Wynn and his board— mindful of the company’s status as a Nevada gaming licence holder and a Macau gaming licence holder—wanted to avoid the Philippines because of its international reputation for corruption.

Mr Okada decided to disregard objections from the Wynn Resorts board and go it alone in the Philippines, resulting in him first being removed as the board’s vice chairman, and then ultimately having his US$2.77 billion stake in the company forcibly redeemed at a steep discount of $1.9 billion, payable in 10 years. Mr Okada is currently suing for that forced redemption to be reversed. Mr Okada first invested in the company that would become Wynn Resorts in 2000. He now clearly has a vision for Manila Bay. He recently told the Philippines media through an interpreter: “My dream is to create the best casino in the world here in the Philippines.” But was it worth his estrangement from Mr Wynn in both commercial and personal terms? After all, Mr Wynn had proclaimed in 2008: “I love Kazuo Okada as much as any man that I’ve ever met in my life. He’s my partner and my friend. And there is hardly anything that I won’t do for him.”

The Manila Bay development, known as Entertainment City, occupies the southeastern portion of the bay in Parañaque City. Entertainment City was first envisioned almost a decade ago by Efraim C. Genuino, former chairman of the country’s gaming regulator-cum-operator, the Philippine Amusement and Gaming Corporation (PAGCOR). The vision to develop a multi-billion dollar entertainment center on the site was held back for years as PAGCOR struggled to find interested international investors. Entertainment City is now finally taking shape, with Mr Okada’s Universal Entertainment Corp., through local subsidiary Tiger Resorts, Leisure and Entertainment Inc., behind the biggest of the four projects being developed at the site.

Mr Okada broke ground on the US$2 billion project on 26th January. The resort is scheduled for completion in late 2014 and will include three hotels, a convention hall, a glass-domed man-made beach, and villas on a 111-acre complex. On 16th July, Empire East Land Holdings Inc., a unit of Philippines property developer Megaworld Corp., announced it had signed a joint venture deal with Tiger Resorts to build a US$1.1 billion residential development, comprising 25 towers in several phases, on a 32-acre site within Tiger’s complex.

Megaworld is owned by local tycoon Andrew Tan, who now has a presence at two Manila Bay projects. Earlier, Megaworld parent company Alliance Global Group Inc. partnered with Genting Hong Kong—a subsidiary of Malaysia’s Genting Group—to develop Resorts World Manila next to the city’s airport. The joint venture between Alliance and Genting, known as Travellers International Hotel Group, has also secured the rights to develop a project in Manila Bay, dubbed Resorts World Bayshore, which is still in the planning stage.

Two other developments are scheduled to open in Manila Bay next year. The first is Belle Corp.’s US$1 billion Belle Grande Manila Bay, controlled by the Philippines’ richest man, Henry Sy. Belle Corp on 5th July entered into a memorandum of understanding with Macau casino operator Melco Crown Entertainment Ltd to form a new consortium that would own and operate Belle Grande. According to a statement from Melco Crown, its “total investment over the course of the project is expected to be no more than $580 million, contributed by a combination of cash, cash flow and debt financing.” Belle Grand Manila Bay is expected to have 880 hotel rooms, 350 table games and 1,900 slots and will open in the second half of 2013.

Also expected to open next year is the US$1.2 billion Solaire, developed by Bloomberry Resorts Corp., which is owned by yet another Filipino tycoon—port operator Enrique Razon. Bloomberry has contracted Global Gaming Asset Management, run by former senior Las Vegas Sands Corp. executives Bill Weidner and Brad Stone, to manage the casino operation at Solaire.

 

Manila Sentiment Booster

It’s clear much of the positive sentiment on Entertainment City’s outlook is based on the strong performance at Resorts World Manila following its August 2009 opening. In 2011, RWM generated US$659 million in net revenue (accounting for over 40% of the Philippines market) and $214 million in EBITDA, which Union Gaming’s Grant Goversten calculates works out to a nearly 40% return on investment.

Most of the action at RWM is generated by locals, and the property has naturally prospered by offering superior service and surroundings to PAGCOR’s sites. Even the bullish analysts agree the majority of RWM’s business derives from locals (though they also point to significant though unquantified business from Koreans, Japanese and Chinese), noting the new IRs could significantly grow the overall market by drawing more international gamblers.

There are legitimate concerns, however, that the Philippines may not be able to attract sufficient international volume to support four major new integrated resorts. Mr Goversten offers four compelling factors in support of that view:

“Location: Manila is a 2.5 hour flight from Guangdong and a 3.5 hour flight from Singapore. Prospective gamblers from China and Southeast Asia (Singapore, Malaysia, Indonesia) would have to bypass the casinos in their own backyards, which also happen to have superior product relative to the planned Philippines IRs (as measured by invested capital).

“Perception is reality: Manila has a reputation as being unsafe, unclean, and impoverished. While this might represent an unfair generalization of the area, we think it could be enough to dissuade customers, especially those from countries like Japan, South Korea and Singapore, from making a purposebased trip to a Manila IR.

“Language barrier: outside of the IRs, Chinese is generally not spoken, nor is signage in Chinese. We believe this could dissuade Chinese patronage, which we believe is the demographic that most of the new IRs believe will be their primary customer.

“Government hostilities: there is an ongoing rift between the governments of China and the Philippines over disputed ownership of an island in the South China Sea. In May 2012, many Chinese travel agencies temporarily suspended the operation of package tours to the Philippines as the dispute heated up. This being said, China was the #4 inbound source of visitation to the Philippines in 2011 with 243k visitors, having grown 30% from 2010. In Singapore, 1.4mm Chinese visited in 2011, or almost 6x the amount to the Philippines.

On a positive note, however, Mr Goversten notes the Manila IRs should be able to offer higher commission rates given that the local gaming tax rate is favorable relative to Macau (15% vs. 39%), but is a bit higher than in Singapore (~12%).

Steve Wynn and Sheldon Adelson have legitimate grounds for their aversion to getting involved in the Philippines. But Kazuo Okada has potentially much more to gain from pursuing a venture in Manila Bay than either of those men, and that is a shot at vying for the right to independently develop a casino property in Japan if and when that country legalizes casino gaming.

Messrs Wynn and Adelson have already cut their teeth developing internationally renowned casino resorts, while Mr Okada is better known for having provided financial backing to Mr Wynn’s efforts, as well as his involvement in Japan’s grey-area pachinko industry and most recently for supplying highly innovative electronic gaming machines. Although Mr Okada’s Manila Bay project offers uncertain returns, it is an opportunity to prove he is equally capable of building and operating an impressive IR.

PAGCOR is making grandiose claims that the Philippines could within a few years become the second biggest gaming hub in the region, after Macau, but Japan clearly stands a much better chance of one day clinching that title. One could question whether Mr Okada may have lost too much in his pursuit of a Manila Bay project by alienating Steve Wynn in the process, but if his ultimate goal is to secure a larger share of a potentially massive Japan casino market for himself, his vision could ultimately prove more profitable than even Mr Adelson’s on Cotai.

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