Inside Asian Gaming

April 2008 | INSIDE ASIAN GAMING provide exciting copy for journalists.Of more interest to LVS shareholders is how any court payout could compound the effect of other financial liabilities the company will face in Macau over the next few years. From the beginning of 2009, LVS will be liabletopaycorporationtaxinMacau—almost certainly on its non-gaming income and quite possibly on its gaming take too.This will be in addition to the current maximum of 40% tax on gross gaming revenue (made up of 35% of the gross plus two contributions of up to 2% and 3% respectively of the gross for social and economic purposes,such as promotion of tourism). Operators also currently have to pay a premium per table and per slot machine. The government has not yet stated at what rate corporation tax—known locally as Macau Complementary Tax—will be levied on gaming operators, though financial advisors PricewaterhouseCoopers said in a note to Macau investors in 2006 that, in general, company incomes above 300,000 patacas (US$37,500) attracted a fixed rate of 12%. LVS mentions the corporation tax issue in its annual report to shareholders for 2007 published on February 29. “We plan to file a request for an [exemption] extension with the Macao government.We cannot assure you that this tax exemption will be extended beyond the expiration date and we do not expect this tax exemption to apply to our non-gaming activities,” says the report. Margins squeezed Corporation tax has previously been waived on gaming companies in Macau, though it’s worth pointing out that all operators are expected to face this additional tax burden,so the pain will be shared equally by the operators. LVS’s Macau margins also face being squeezed in other ways. Rapid expansion of the LVS operation in Asia and the US has inevitably pushed up operating costs, and further expansion is planned. The Venetian Macao (with its half million square foot casino) is just the first part of an ambitious scheme to build a total of 1.6 million sq. ft of gaming space on Cotai,providing 3,300 table games and 16,470 slot machines, served by 19,750 hotel rooms and suites. Stalled growth The difficulty from the markets’ perspective is that a rise in capital costs and an expansion in LVS’s gaming capacity in Macau has coincided with a couple of blips on the upward curve of the company’s Macau revenue growth. In Q4 2007, LVS saw revenues rise 65% to US$1.05 billion,but that was below the US$1.12 billion that analysts had expected. LVS has been at pains to emphasise Macau’s good news story is still on track. Just before publishing its annual report for 2007 in February, the company held a conference call with analysts. LVS Vice President of Asian Operations Stephen Weaver explained there was a general upward trend despite several adverse events early in the year, including January’s snow storms in China, which coincided with a 6.2% fall in mass market revenue year-on-year from US$290 million in January 2007 to US$273 million in January 2008. Mr Weaver said that on the plus side, government statistics suggested average visitor spending rose to US$176 a day in January compared to US$145 a day in December. He added that although VIP rolling chip volume declined 22.2% from US$3.6 billion in December to US$2.8 billion in January, the company expected that particular trend to reverse. Crisis? What Crisis? None of this amounts to a crisis or even a turning point in the Macau good news story,as far as LVS is concerned, but it is increasing the nervousness of some already bearish analysts. Mr Adelson has said many times that observers need to focus on the general trend, not individual blips on the graph.Some of the challenges,though,relate to microeconomic and macroeconomic conditions beyond the company’s immediate control. In Macau, labour costs have risen along with general inflation. The composite consumer price index rose 9.47% in February according to the government’s Statistics and Census Service. On the capital projects side, world commodity prices have also soared. Mr Adelson admitted last year that the original US$10 billion price tag for Cotai could be exceeded by up to 30%. The company says in its annual report for 2007:“[Global] Operating expenses were $2.62 billion for the year ended December 31 2007, an increase of $957.8 million as compared to $1.66 billion for the year ended December 31,2006.The increase inoperating expenses was primarily attributable to the higher operating revenues, growth of our operating businesses in Macao and to a lesser extent Las Vegas and pre-opening activities….” Expenses The company added casino expenses for the year ending December 2007 rose US$510.6 million compared with the same period in 2006, though it said US$322.1 million of that was due to 39% gross win tax on higher revenues from its Macau operations. LVS said US$109.6 million of the extra casino expense was attributable to The Venetian Macao. “The remaining increase was primarily attributable to additional payroll-related expenses and our Rolling Chip program at Sands Macao,” added the report. Good old days It seems a long way from the heady days of May 2004. Then, Sands Macao opened as not just the biggest casino outside the US but one with lean and low project costs and one of the best ROI rates in the gaming world. Sands Macao appeared the perfect product at the right time. Its stadium- style design proved ideal for enthusiastic mass market Chinese customers crowding eight deep around its baccarat tables. It had no competition from other Las Vegas operators, and its modest US$265 million price tag made it a cash machine recouping its capital costs within a year. Sands Macao 17 Feature