INSIDE ASIAN GAMING | February 2008 Absorption Year Editorial Editor and Publisher Kareem Jalal Director João Costeira Varela Business Development Manager Matt Phillips Operations Manager José Abecasis Contributors Michael Grimes, Steve Karoul Graphic Designer Brenda Chao Photography Ike Inside Asian Gaming is published by Must Read Publications Ltd Suite 1907, AIA Tower, 215A-301 Av. Comercial de Macau - Macau Tel: (853) 6646 0795 For subscription enquiries, please email
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[email protected] or call: (853) 6646 0795 www.asgam.com Printed by Icicle Print Management (Macau) Ltd Tel: (853) 2871 2818 Fax: (853) 2871 2898 www.icicleprint.com T he way the financial markets have been going lately, Inside Asian Gaming has heard several small investors complain they would have been better off risking some of their money at a casino, rather than tying up large sums in an overhyped stockmarket. The suggestion is perhaps not as ludicrous as it sounds if the goal is short-term speculation, rather than generating steady financial returns and securing a retirement nest-egg. After all, at a casino you theoretically have control over howmuch you risk.Las Vegas Sands Corp (LVS) Chairman Sheldon Adelson had no control over the US$10 billion fall in his net worth since October,when shares of US-listed gaming companies with Macau operations began a steep descent. Furthermore, while you know the odds are against you at a casino, you can be lulled into false sense of security by bullish analysts when investing in stocks. The stock prices of US-listed gaming companies with Macau exposure have fallen sharply since October in linewith the decline of the overall stockmarket andworsening outlook for the US economy,but also as analysts realise their predictions of instant, explosive growth in Macau were overly optimistic. LVS and Wynn Resorts saw a major decline in their stock prices after Macau’s casino revenue for September—the first full month following the opening of the mammoth Venetian Macao-Resort-Hotel on August 28—came in below analysts’expectations.To highlight just how lofty those expectations were, the September revenue figure grew 55% year-on-year—Atlantic City, which saw its first year of casino revenue decline in 2007 in the wake of competition from new Pennsylvania slot parlours, would have been ecstatic at such a result. Analysts now say that while the stock prices of LVS, Wynn Resorts and MGM Mirage had been overpriced in October, they have recently become underpriced. The analysts do not add, however, that their proclamations are a key driver of the valuations,or that claiming revenue expectations were not met provides a good opportunity to take profit after their previous hype had driven up prices. Claiming a company’s stock price is fairly valued is also hardly headline-grabbing. By comparison, the swings at the baccarat table are only driven by probability, which is immune to accusations of holding ulterior motives. Whereas gamblers on a streak theoretically have nothing to gain by encouraging others to follow their bets, stockmarket investors clearly do. Once again, analysts are talking up the gaming stocks, calling for patience as Macau ramps up and new properties such as Venetian Macao and MGM Grand Macau hit their stride.The same analysts who aggressively touted Mr Adelson’s supply-creates-demand thesis now point to the very limited Macau supply growth scheduled for 2008—in contrast to 2007,when the Grand Lisboa, Crown Macau, Venetian and MGM Grand Macau were all opened—to say this will be a much needed“absorption year.” Despite the moderate tempering of bullish sentiment, Macau remains a phenomenon. Casino revenues rose 46% to US$10.4 billion in 2007. Having overtaken the Las Vegas Strip in terms of casino revenue in 2006, Macau is now closing in on all of Clark County, which contains Las Vegas, and recorded US$10.6 billion of casino revenue in 2006. As with any market on spectacular high growth track, Macau will see its share of speedbumps. LVS President and COO WilliamWeidner commented recently:“It’s like driving your new Ferrari: you spin the tires when you first get out the gate.You’ve got to figure out how to have this thing run.” Some of the speedbumps are beyond the operators’ control, such as the severe winter storms in mainland China that led to a decline in Macau visitor numbers in January. Others are created by the operators, such as the commission war in the VIP market. Crown Macau recently intensified that war, securing a greater share of VIP business at the expense of other operators—and arguably at the expense of itself too, given the erosion of margins, which will see it struggle to make a profit despite huge VIP turnover. LVS has responded by introducing a profit share scheme in its VIP rooms, which effectively raises its own commissions. VIP Baccarat continues to constitute over two thirds of casino revenue in Macau, and the erosion of margins does not bode well for operators’ bottom lines. Competition should revolve around innovation rather than commission wars, and crowd-pulling innovation does not have to be costly. LVS recently reported its fourth quarter results, which show some cannibalisation at its first Macau property, Sands Macao, as players started going to the Venetian. Inside AsianGaming is a fan of SandsMacao and its revolutionary stadium-style design,which continues drawing mass-market crowds despite the opening of newer and much more expensive properties.Fourth quarter operating income at Sands only fell about 10% short of that at Venetian, and considering the original cost of the former was about a tenth of that of the latter, Sands is generating a remarkable return on investment—of a magnitude that can only be derived by coming up with a truly revolutionary product. Kareem Jalal We crave your feedback. Please send your comments to
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