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Towering Ambition

Crown Towers' luxury gaming suites could be City of Dreams' secret weapons in the VIP war

Tuesday, 12 May 2009 00:00
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The recent media preview tour around the new US$2.1 billion City of Dreams resort at Cotai developed by Melco Crown Entertainment (Nasdaq: MPEL) was as interesting for what it missed out as for what it revealed.

Crucially, the jewels in CoD's VIP gaming crown (no pun intended) were not shown to reporters. These are the salon-style high roller table areas on levels 25, 26 and 27 of Crown Towers.

Those premium areas are likely to be the real battleground for top-level VIP business on Cotai. They will be up against Las Vegas Sands Corp's club-style gaming rooms attached to suites at The Four Seasons Macao, and against Paiza, the top line VIP club offer at The Venetian Macao.

Priority

CoD's first task must surely be to build MPEL's VIP business in Macau and/or take share from its industry rivals, given the enduring importance of VIP roll in the local market. Lawrence Ho, MPEL's Co-Chairman and Chief Executive, acknowledges that a successful launch for CoD will be crucial for the future of his joint venture with the Australian casino operator Crown Ltd, led by James Packer.

"We know the pressure is on us," said Mr Ho, speaking at the time of the media tour. "The success of it will have major implications," he added.

Mr Ho arguably has a more sceptical investment community to deal with than does his father, the former monopolist in the Macau gaming market, Dr Stanley Ho. MPEL is listed on New York's Nasdaq, and not the generally more Ho-friendly Hang Seng in Hong Kong.

If CoD faces any glitches at opening, it shouldn't be for want of operational cash. In late April Crown Ltd agreed to pump US$45 million in additional equity into the joint venture. The move is part of a US$165 million equity placement recently announced by MPEL.

Operating cash

MPEL said in a filing to the US Securities and Exchange Commission that it expected the placement exercise would produce a net income (less fees) of US$144.3 million, or US$160.5 million if an over-allotment option by the underwriters Deutsche Bank Securities Inc, Merrill Lynch, Pierce, Fenner & Smith and Oppenheimer & Co Inc is exercised in full.

MPEL said in the same SEC filing it intended to use the cash to reduce debt on the CoD project; for funding growth of subsidiaries; for working capital requirements and general corporate purposes.

Following the MPEL placement and assuming full exercise of the over allotment option, Crown's ownership interest in MPEL will be diluted slightly to 36.4%.


Dream World

What visitors can expect from CoD

CoD President Greg Hawkins told Inside Asian Gaming that the first phase of CoD is due to open in mid-June. But days later the company announced that was being brought forward a fortnight to 1st June.

That initial phase features the business heart of the resort: the main gaming floor; the VIP gaming areas; the Hard Rock Casino and its accompanying hotel; the Crown Towers hotel; The Boulevard (a shopping zone); restaurants and The Bubble, a futuristic pod-like structure offering an animated light and sound show called Dragon's Treasure. Asia's first Hard Rock Hotel and Casino combo comes complete with a starter pack of rock star memorabilia donated by local Cantopop legend Jacky Cheung.

Slot mix

The gaming facilities will offer a total of 520 gaming tables and around 1,350 gaming machines. On casual inspection of the main gaming floor, Aristocrat appears to have the lion's share of the slot market at City of Dreams, including the ever-popular Cash Express and Fa Fa Fa Hyperlink games.

Bally Technologies Inc confirmed to IAG that it is providing just under 25% of the machines in the property, including Hot Shot Progressive units. IAG also spotted a bank of Atronic's very successful two-level progressive DEAL OR NO DEAL™–THE EXPERIENCE based on the popular television game show produced by Endemol.

Mr Hawkins said the main floor will have some entry-level tables with minimum bets of HK$200. Given the mathematics of running a baccarat table in Macau (only locals can be employed as dealers and they tend to be paid more than migrant workers), that entry price is pretty much standard.

Judgement

The early performance of CoD will go some way to answering whether Galaxy Entertainment Group made the right call by effectively mothballing its own Cotai project next door. MPEL will certainly be hoping that Galaxy resumes work sooner rather than later, given that many of the first guests at Crown Towers and the Hard Rock Hotel Macau will have a view of Galaxy's building site.

The importance that MPEL management places on building the company's VIP gambing business is revealed by the decision to concentrate in phase one on opening the upmarket hotel accommodation. This consists of the 300-room Crown Towers including 55 suites and 33 'villas' (they are in effect super sized suites on the uppermost floors); and the 300-room Hard Rock Hotel with 70 suites (including two branded 'Rock Star Suites') and an accompanying Hard Rock Casino. The more middle market Grand Hyatt Macau offering the balance of the resort's 2,200 hotel rooms, won't be opening until phase two, due before the end of this year.

An obvious question is where this additional VIP capacity on Cotai leaves Crown Macau, MPEL's overwhelmingly VIP-focused property at nearby Taipa. That was answered in part when MPEL announced in late April that Crown Macau was being rebranded as 'Altira Macau', under the leadership of Ted Chan. Mr Chan's recent professional career highlights the often symbiotic relationship between casino operators and junket agents in Macau. Mr Chan is a former CEO of Mocha Clubs, MPEL's slot club unit aimed at local Macau players, He left MPEL in 2007 to take up the CEO job at Amax, the Hong Kong-listed junket aggregator, shortly before it started feeding high rollers to Crown Macau in the fourth quarter of 2007. He then moved back to MPEL in November 2008 as CEO of Crown Macau.

Crown Macau, a.k.a. Altira Macau, has proven itself a very successful player in the high roller market. It had a shaky start in May 2007 when it opened seven months late and massively over budget (with a final US$583 million price tag versus an originally budgeted US$192 million). Since then Crown/Altira Macau has managed to grab a significant slice of VIP gross gaming revenue in Macau. This was thanks to its market-storming 1.35% rolling chip commission offer to Amax. Amax duly obliged by sending lots of business to the then Crown Macau, allowing the property to grab a near 20% share of the VIP market by the first quarter of 2008. Amax claimed last month that rolling chip volume generated in the fiscal 2009 twelve-month period ended 31st March 2009 totalled approximately HK$341.6 billion. It said this was a market leading level of VIP gaming volume at a single casino in Macau for the relevant period.


Marketing Dreams

How will CoD and the newly rebranded Altira Macau work together?

How does MPEL intend to make Altira Macau (the newly rebranded Crown Macau) and Crown Towers a mile or so away at CoD, work together in the VIP market? The answer to that question has been delivered in instalments. The first part came from Greg Hawkins, President of City of Dreams, during the tour of the new Cotai site. The second part came a few days later with the formal announcement that Crown Macau would be rebranded as 'Altira Macau'.

In response to a query posed by a journalist from BusinessWeek at the end of the CoD tour, Mr Hawkins revealed that at least 60% of Crown (Altira) Macau's rooms are 'comped' as it's known in the casino trade, i.e., complimentary for VIP players and therefore not directly earning revenue. Mr Hawkins said he couldn't recall the exact figure of 'comps', but if he was willing to concede 60% without consulting the paperwork or his subordinate staff, it's safe to assume the figure may be even higher.

"Crown Macau [Altira] is only 216 rooms. It has a fairly small room base and fairly large VIP activity. So by the nature of that the large percentage of rooms would be gaming related—without being able to give you a specific number," he added.

Direct marketing

He also confirmed that the amount of so-called 'direct play' (where the operator brings in players by itself, cutting out the middleman agent and his commission) at Crown/Altira was minimal.

"We have a direct business there [Altira] as well. I don't think we've gone public on that type of split, but it's a small percentage obviously."

Crucially Mr Hawkins also revealed that Crown Towers would be aiming to draw in more direct VIP players (presumably from outside Mainland China).

"Generally there will be direct VIP business in Crown Towers and more junket VIP business on level two [of City of Dreams' gaming area]. It's quite distinct," stated Mr Hawkins.

MPEL clearly has an incentive to seek a better business model for its VIP business at CoD, given that at Crown/Altira has definitively set out its stall as a high volume, low margin operation relying on volume of roll for a living.

Sources who have seen the Crown Towers VIP gaming rooms, though, say they look to be a copy of those at Altira.

Perfect start

MPEL's reason for not showing the media its VIP gaming areas in Crown Towers at CoD wasn't revealed. The company must obviously be concerned, though, to get the presentation of the property absolutely right before unveiling it to the market, given that Crown Towers is likely to face stiff competition from LVS at the nearby Four Seasons and at Paiza.

Morgan Stanley Research Asia/Pacific—in a recently published market outlook report on Macau titled Macau Gaming & Property–Turning the Corner—says as much.

"Opening of 'City of Dreams' could intensify competition: We believe CoD will drive [Macau] visitor arrivals up; however, it will also compete fiercely with Venetian for the mass and VIP share coming to [The] Cotai Strip. This could result in bigger discounts and narrower margins in the interim for both operations," stated the analysts in the report.

"We expect CoD and GMR [Galaxy Macau Resort] to deliver lower returns on investment than peers, such as Sands and Venetian, as the market matures and revenue growth slows down," adds the report.

Any cap on VIP agents' commissions, whether introduced on a nominally voluntary basis by the Macau government, or by mutual agreement between the operators following their recent talks via the forum of the Macau Gaming Operators' Association, could be more of a threat to Amax's business at Altira, than it would be to Crown Towers' high roller business if MPEL can deliver on its promise of bringing in more direct players.


Battle of Cotai

How will Crown Towers shape up against Las Vegas Sands' VIP offer?

Despite MPEL's decision not to unveil its premium VIP gaming rooms on the media tour, Greg Hawkins, President of City of Dreams, gave Inside Asian Gaming a detailed description of what high rollers at Crown Towers can expect.

"Our customers staying in a suite or villa in the property will get the VIP lift down to the gaming levels in Crown Towers," explained Mr Hawkins.

"On levels 25, 26 and 27 of Crown Towers, we've purposefully designed the VIP gaming areas at a level of privacy, luxury and opulence which would make a VIP player feel 'This is one of the better environments for me to game in'. So the use of design features and leather and posh carpets and gold leaf ceilings and chandeliers are the kind of elements that are important to give it [the VIP gaming area] that type of sought-after symbolism. We balance that with the service experience which has to be as good as anything in the market, to make sure that kind of customer is satisfied," he added.

Luxury

Mr Hawkins stressed that exclusive feel would extend to the way the gaming tables themselves are laid out at Crown Towers.

"They [the gaming rooms] are predominantly salons, so you can think of it as like a private room with one or two tables in them."

MPEL is confident that the strength of the Crown brand and the brands of the other hotel partners at City of Dreams will guarantee City of Dreams success in an extremely competitive environment.

"I think the key to VIP business really is relationship management. As you build a team of sales and marketing personnel, the quality of them and their experience really does assist to get a very good reputation with the VIPs and an attraction for VIP players," stated Mr Hawkins.

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