Inside Asian Gaming

6 7 visitors, the Crown brand does not hold any more allure than the US brands already oper- ating in or about to open in Macau, including LVS, Wynn Resorts and MGM MIRAGE; and ii) why would PBL send its Melbourne high-roll- ers to Macau, where it has to share revenues with Melco, when it could keep all revenues for itself back home? The US operators coming to Macau made similar claims about getting customers direct and circumventing junket operators, before having to quickly back-pedal. Crown Macau recruited some of the city’s highest-paid VIP marketing managers in Macau, seeking to directly draw high-rollers. However, accord- ing to the junket operators, Crown is now also simply trying to buy business by raising its junket commissions to 1.2%—1.0% plus 0.2% (expenses). So you supposedly have here the most expensive talent in the region backed up by the most luxurious property, yet you also go out and give the highest commis- sion rates—a bit like Rolls Royce lowering its prices to win customers fromToyota. For that you don’t need expensive marketing talent. Any college graduate can come up with that sort of strategy. Melco PBL’s stated intention of going af- ter the premium end of the main hall is an- other objective belied by its actions. Crown is giving away HK$50 (US$6.4) matchplay vouchers to every Wong, Wu and Weng that jumps on its buses. And if you join the Crown Club, you get another HK$30 credit on slot play. Hardly the sort of refined and highly targeted promotional tool one would use to attract premium players. The Filipino network is already abuzz about Crown’s foreign workers being sent back home due to the lack of business. One would have thought that Crown’s highly paid Aussie managers should have been targeted for their lack of adaptability and performance to date. After all, they are the ones making the decisions, not the lower ranks. On top of that, Crown does not have much of a honeymoon period to settle in as coming hard on its back is the colossal Venetian. Part II: A Look on the Bright Side Although Crown Macau is targeted at draw- ing VIP customers, when it opened on May 12, neither its VIP or hotel rooms were ready. This, along with the property’s other teeth- ing troubles, pushed the stock price of Hong Kong-listed Melco International Develop- ment to a 52-week low of HK$10.54 in June. Macquarie Securities Conglomerates and Gaming analyst Gary Pinge points out “The stock has been the hardest hit by negative sector sentiment and disappointment over delays and cost overruns at its first casino. However, as at the time of his report, the stock was at current prices, the stock trades at a 55% discount to US peers.” Melco’s US peers with Macau operations are trading at an average multiple of 17.0x growth-ad- justed EV/EBITDA, explains Mr Pinge, while Melco was trading at a multiple of around 7.5x in mid-June, when he released his com- prehensive report on Macau’s gaming sec- tor. Crown’s VIP and hotel rooms were fully operational by the end of June, reveals Mr Pinge, and so while “Melco’s shares have un- derperformed the Hang Seng Index (HSI) by 75% over the last 12 months… we believe that, at the current price, the majority of the risks have already been factored in and that the performance of Crown’s VIP rooms in Au- gust/September will be a key turning point for the stock,” and the discount to US peers will begin to narrow. “Melco is due for a re- rating,” claims Mr Pinge, putting a HK$17.45 price target on the stock. The price had al- ready rebounded to around HK$13 by early July. Another perspective In his report, Mr Pinge spells out the weak- nesses of Crown Macau’s location: “The casi- no sits away from the main peninsula, on Tai- pa, and has few other entertainment, dining, shopping or gaming precincts around it. We believe that this will be a significant disad- vantage for attracting mass-market custom- ers who are often keen to switch between casinos and to look around other shopping or entertainment venues. Furthermore, the casino is 15-20 minutes away from the main Peninsula ferry terminal.” Although some claim Crown’s isolated lo- cation may also deter VIP players from com- ing to the property, because high-rollers are also inclined to casino-hop,Mr Pinge believes “The casino’s secluded location as well as its six-star dining and entertainment facilities are likely to attract VIP demand. Furthermore, it is close to the airport and away from the traffic jams of the casinos on The Peninsula.” Contrary to Octo Chang’s claim that the opening of Venetian Macao will drive busi- ness away from Crown, Mr Pinge argues: “In the long term,as the Cotai strip develops with new casinos (The Venetian, Galaxy’s Mega Resort and City of Dreams) and the new ferry terminal opens, we believe that Crown Ma- cau will be successful. We believe that the opening of The Venetian will be a must-see attraction in Cotai and, as such, there will be increased mass-market foot traffic in Cotai/ Taipa, both of which will benefit Crown Ma- cau in the medium term.” Gary Pinge is also more sanguine about the potential benefits to Crown Macau of