Scientific Game

Business Not as Usual

Neptune Group’s Nicholas Niglio on Macau, the state of the high end, and a new junket model for the market

Thursday, 18 October 2012 13:30
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While so much has been written and studied about the massive investment in resort development that is transforming Macau from a Cantonese gambling enclave into a multifaceted leisure destination for all of China and beyond, so little is known publicly about the junket operators and VIP room promoters that drive the growth behind this largest and most unique of the world’s casino markets. What we get instead—journalism, like Nature, abhorring a vacuum—generally is ill-informed or surmised, a lot of it simply imagined; and, not surprisingly, what we think we know about the junkets and their operations is almost always negative, which not only does them a disservice, it gets in the way of our understanding of this amazing evolutionary tale and of the vital role the junkets have played, and continue to play, in moving it forward.

Fortunately, this is changing, and it’s changing because of companies like Neptune Group. Under CEO Nicholas J. Niglio, publicly traded Neptune, the largest junket player listed on the Hong Kong Stock Exchange (0070.HK), has been in the forefront of a business model that is evolving side by side with Macau. It’s a diverse, financially sophisticated, highly transparent model through which Neptune invests in VIP room promoters in exchange for a share of the rolling chip turnover the rooms generate—a partnership model in which everyone benefits: the promoters, the casinos and Neptune.

Mr Niglio’s long career was forged in the intensely competitive Atlantic City market, where he served in numerous executive roles, including vice president of casino operations and senior vice president, Eastern operations, at Caesars World and as an executive vice president at the Trump casinos, where he oversaw domestic and international marketing. Under his leadership, Neptune has grown profits more than 300% in the last three years to HK$200 million in 2011. And the company continues to expand, both through its ties to privately held Neptune Macau, which directly promotes some 220 VIP tables, and through its own profit-sharing agreements. The Group recently concluded memoranda of understanding that will add 64 tables at Grand Lisboa, Wynn Macau and MGM Grand to its existing investments in rooms at StarWorld, The Venetian and Sands Macao. These agreements will more than double its portfolio of tables and triple the total rolling chip turnover in which it shares to about HK$45 billion a month. Mr Niglio recently spoke with Inside Asian Gaming about these moves and shared his thoughts on Neptune’s plans going forward and the state of the VIP market in Macau.

IAG: With these new investments at Grand Lisboa, Wynn and MGM, what will be the impact for Neptune?nick niglio

Nicholas Niglio: The impact will, I believe, double our earnings, because it’s doubling our capacity. It’s the same system of investment, where the return from the casino, the percentage basis, is going to be the same, 0.4%, and that’s consistent with what we’ve had for the last three to four years. The three properties, not a whole lot of difference in the turnover within the group. These three are probably our higher-end ones, which means it can even be incremental, more than a doubling, because these are our flagships. … Actually, if we had done this a year ago it wouldn’t have had the impact on our financial statements as it will today, because those three properties, the way they’re performing, they’re peaking now.

And the increase in monthly rolling chip turnover, obviously that is significant as well. You’ve got to feel good about that.

It’s a new start, truly a new start for this company, something that we’re very happy to see.

Do you see these deals then as providing momentum for more investments along these lines?

Well, it takes us almost to a saturation point. There is a little bit more room to include all the concessionaires. But you can only go as far as the concessionaires.

So where do you go from here?

The group for years has always had the objective to expand its total portfolio past Macau. I think at the point that we feel Macau has been systematically absorbed, as far as we can go, then I’m sure you’ll see things happening elsewhere. I’m not ruling anything out.

Would this include acquisitions? We’re hearing a lot these days about consolidation in the sector, both as a result of a slowdown in VIP revenue growth and the slowdown in China that is having an effect on credit markets.

There is some consolidation. I don’t think it has gotten to the point where it’s noteworthy. I mean, what we did is an investment rather than a clear consolidation. It’s a further enhancement of our presence here. It doesn’t change the nomenclature of the rooms themselves. What you’re referring to are takeovers, where you have a medium-size company like [Asia Entertainment & Resources Ltd] for instance, purchasing a small six-table junket. The impact is not noteworthy just yet. However, I’m happy to see that. It’s been very difficult for the small junkets to partake in this market because the big five control so much of the turnover. They’ve got the same problems and pressures that we have but without the capital and without the infrastructure to exercise adequate controls. It forces them to make credit decisions that they may not normally want to make, but they’re almost forced into it. And when you don’t have much, and you lend out a little bit, and it’s not property scrutinized as much as you would want it to be, then all of a sudden it slows down, next thing you know you’re looking for somebody to help you, and that’s where the slowdown has been.

Who are the big five?

Neptune, SunCity, David’s Palace, Jimei Group, Golden Resort Group. AERL has invested in about 29 tables. They’re a midcap. We’ll call them a mid-cap. There is no other word for them. I give them credit for listing. I don’t think they represent the industry that well. They add some confusion to the marketplace. They’ve been through several auditing firms. I’m glad they’re there rather than not there, but I wish they would tone it down and standardize themselves a little bit. Maybe as they grow they will. … I’d like to see more big ones develop. I’m talking about bigger junkets. I’d like to see a big six or big seven. I think that’s good.

Is there room?

I don’t know. That’s just it. I don’t see anybody on the horizon that can do it. I want to see Macau’s numbers be as good as they can possibly be. I’m very pro-companies, very pro-Neptune, obviously. But I’m also pro for the concessionaires and the government and for the region.

It doesn’t sound like you’re concerned about the market slowing, or possibly even contracting at some point.

Well, again, Neptune is not in that category. If you take our numbers from a year ago, they’ve literally doubled. We’re as strong as ever. Is there slippage? Some maybe aren’t doing the numbers that they did a year ago. Possibly some are overextended in terms of the table positions they’ve taken on. And then there’s the little guy I told you about. There’s no one factor. They always blame China, it’s GDP and all these things, it’s not that, the market is so big that China can do what it wants to do and the gambling dollars are always going to be there for Macau because there is no competition. It’s all going to come here. But certainly I believe that sometimes the junkets are their own worst enemies in terms of doing business. If you’re not professional and you’re not well-funded, that’s two items, and if you’re not positioned in the casinos properly and if you’re not everywhere like we are, you can lose business that way, not because there are economic reasons, it’s just the fact that you’re not doing a good job yourself.

So it’s a tougher market, competitively, more than anything?

Yes. I mean, I’m not bothered by it all, and none of the concessionaires are bothered. The only people bothered by it are Wall Street. Because they love to be bothered by different things. They just key in on these slippages that we’ve had. But if you look, if you try to analyze where the slippage is, nobody can do that. You can’t say which junket is down, you just say VIP is down. But it could be one or two junkets that are skewing the whole thing. Could be. Nobody knows. If everybody was like Neptune and everybody ran their operation like Neptune and SunCity you wouldn’t have the slippage. It would be growing.

Do you see listings like Neptune’s as a way forward in this respect?

There are only four at the moment. But they differ in terms of focus, profitability and reasoning and purpose. I mean, Amax, they’ve been suspended for so long, I don’t know if they’ll ever trade again. Neptune is the only pure play. The others have other side businesses.

But certainly there are advantages.

Access to capital. Fund-raising. And there is a tremendous comfort level among the concessionaires. They like that. Sheldon Adelson told me himself that he really likes our company, and one of the reasons why he likes our company is because we’re listed. It creates a platform of honesty and integrity, and certainly regulatory transparency. Not too many can offer that to a concessionaire. And he appreciates that. That’s the advantage.

This would seem to indicate that the investment community has become more comfortable with the sector as well.

The investment community has always been interested in the VIP business. But they’ve always had a language problem, and many other problems, in terms of the proper connections and getting feedback from the junkets. There wasn’t anybody to talk to. We’ve done some, actually we did quite a bit, then we kind of slowed down, now it’s picked up again. I don’t think there’s anything that we say that is so earthshattering or revealing. It just backs up what the concessionaires tell them. And their focus is the concessionaires, of course, when they issue their research reports.

Does it present more opportunities for growth?

Well, you know, we’re very much at the beck and call of the concessionaires. So as the concessionaires expand and build and turn land into these spectacular integrated resorts, we’re right there with them as partners. That’s where we are right now. Can Neptune in the future be a concession, maybe part of a process like City Clubs, something like that? Absolutely. There’s that possibility. I don’t know if and when it will happen, but it could happen, whether it’s in Macau or somewhere else. Certainly our comfort level is very high here, not so high in some of these other countries. We get asked all the time. But we like the regulatory framework here, the comfort level of the spoken language being Mandarin and Cantonese, some English. We believe there is honesty in the government and things like that. … After Neptune Macau opens their final room, in MGM, there will probably be a bit of a slowdown in terms of openings, because we’re everywhere, and quite large everywhere, and we’re located properly, so it’s not like there’s any need to move. So after MGM we’ll wait. Galaxy’s Phase II is too new, and we’ll wait on City of Dreams, and within three or four years we’ll probably have 20 rooms.

Your forecast for Macau for the balance of the year?

At the end of last year I was predicting 15-17% growth for 2012. I think I’ve got to backtrack it a little bit. I’m kind of going with the consensus, in around the 9-12% range. The lead-in to Chinese New Year is always good. And the weather is more comfortable. And the kids are back to school. Not a lot of distractions that people have. The factories are back open and running. People are not on vacation. A lot of that is helpful on the VIP side.

And for 2013?

Thirteen-15%. But I’m not a fortune teller. I mean, everybody has been adjusting their numbers. Even Francis Lui. He started the year off at 21%. I think he’s on his third number.

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