Inside Asian Gaming

INSIDE ASIAN GAMING | July 2008 42 I n the midst of all the chatter about Sociedade de Jogos de Macau (SJM) listing on the Hong Kong stock market, an important fact stands out.When it comes to raising equity, it’s not just about size, it’s what you do with it that counts. SJM certainly hasn’t been spending as much on hardware as the Las Vegas newcomers. Its flagship property, the Grand Lisboa, which opened in February 2007, will have reportedly cost around US$400 million by the time the hotel is completed later this year or early next. The VIP extension being built at Wynn Macau and due to open in 2010 will cost a third more than that on its own. Who’s laughing now? Some western commentators may sneer at the supposed gaudiness of the Grand Lisboa, but does higher cost really mean higher quality in terms of Macau gaming investment? And will quality confer competitive advantage in the Macau market, or will a Wal-Mart style ‘pile ‘em high, sell ‘em cheap’ philosophy triumph? If the current trade war on junket commissions has proven anything, it’s that for Chinese high rollers the ‘software’ (i.e., attractive credit offers to players) is more important than the ‘hardware’ (i.e., fancy surroundings and chic restaurants). SJMdoes appear to have been offering better returns to investors than its American rivals—so far. In 2007, SJM posted HK$1.49 billion (US$190 million) pre-tax profit (all but a tiny percentage of it attributable to shareholders post tax) on net gaming revenue of HK$19.65 billion (US$2.52 billion). In simple terms, that’s a 7.6% yield on net revenue. In its 2007 annual results covering Las Vegas and Macau, Las Vegas Sands Corp (LVS) reported net income of US$116.7 million on net revenues of US$2.95 billion. That’s a simple yield of 4% on net revenue. LVS’basic earnings per share were equal to diluted earnings per share at 33 cents. Rivalry A little caution is required when trying to compare rival organisations and their separate accounting systems.The SJMfigures come from company data supplied with the IPO prospectus, so are likely to offer the most generous possible interpretation of SJM’s trading position consistent with ethical accounting. Some of the really interesting numbers are in the rivals’operating expenses. SJM’s have been going up like everyone else’s, reaching HK$5.8 billion (US$740 million) in 2007, and equivalent to 29.5% of net revenue.In the same period,LVS operating expenses for Las Vegas and Macau rocketed to US$2.62 billion.That’s 88.8% of net revenues. Many Happy Returns SJM seeks to spend its IPO pot wisely SJM IPO High performance Under these circumstances, the headline figures showing a year- on-year fall in SJM’s Macau market share can be a bit misleading. SJM is outperforming LVS nearly 2:1 in simple yield on net revenue, and the Macau pie is growing. If SJM opts for more of the same in the next few years, which is essentially provision of hardcore gaming and fewer frills in a distinctively Chinese setting with healthy returns on investment, then it’s a calculated gamble. If consumers embrace the integrated resort model advocated by LVS and Wynn, then SJM could be left looking dangerously exposed and outmoded. An initial public offering by SJM was first touted as long ago as April 2006. Last year, it was delayed by a series of unfortunate events including a legal tussle between SJM’s chairman Stanley Ho and his sister Winnie (a 7.34% shareholder of SJM’s parent company STDM) over who exactly had the right to control what. Earlier this month, SJM announced it was delaying the listing to July 16—it was originally scheduled for July 10—because of Winnie Ho’s application for a judicial review to block it. Hong Kong’s high court rejected that application on July 9, and as Inside Asian Gaming goes to press, the listing is set to proceed. The Grand Lisboa