Inside Asian Gaming

45 44 Melco Shares Soar The last issue of Inside Asian Gaming discussed how huge institu- tional demand for shares in Hong Kong-listed Melco could make Citigroup’s HK$15 price target on the stock a “Sure Bet.” The target was issued at the start of 2006, when Melco’s shares were trading at around HK$9. Soon after Citigroup issued its call, the share price began a steady ascent to HK$12. The acquisition by the Melco-PBL joint venture of Macau’s last remaining casino operating sub-concessions fromWynn Resorts (more on page 26) provided the impetus for the share price to surge past the HK$15 target, despite the hefty sum demanded by Wynn Resorts. Also helping the rise in Melco’s stock price was the release of its 2005 financial results at the beginning of April, which saw profit jump nine-fold to HK$548.7 million, from HK$59.7 million in 2004. However, the profit included a one-time gain of HK$514.4 million from the sale of interests in its upcoming casino projects to its joint venture partner, Australia’s Publishing and Broadcasting Ltd (PBL). Melco’s 2005 sales only rose 47% to HK$600.6 million. Melco currently runs six Mocha Slot outlets in Macau with more than 1,000 slot machines, which contributed HK$135.2 million of rev- enue in 2005, up 183% from a year earlier. Melco will not book any casino revenue until it opens its first hotel-casino, the US$192 million Crown Macau, in April next year. The casino portion of Crown Macau was originally to have opened in September, followed by the hotel in the first quarter of 2007, but in what may be the first of many delays in the ambitious new casino and resort projects slated to open over the coming months in Macau, the combined opening was pushed back to April 2007. On April 10, Melco-PBL broke ground on its most ambitious casi- no-centered project in the city, the US$1 billion City of Dreams, slated Regional Briefs to open in 2008 and which, in addition to its casino featuring an “un- precedented underwater environment,”according to PBL head James Packer,will consist of three boutique hotels with 2,000 rooms and two blocks of deluxe serviced apartment. Melco’s other income sources at the moment include its invest- ment banking and gambling consultancy business. Melco further broadened its scope of activities by announcing a 20-year alliance between its technology arm, Elixir, and Shuffle Master Inc, a developer of technology-based products for the gaming industry to jointly de- velop localized gaming technologies in Asia. The alliance included an exclusive Asian distributorship for Elixir of Shuffle Master’s existing gaming products, as well as Elixir’s creation of an Asian-focused re- search and development center in Macau and a world-class manufac- turing base in China. S. Korea Extends Casino Locations South Korea amended its tourism laws to allow upscale hotels in all parts of the country to include casinos (with entry restricted to for- eign nationals). Previously, casinos for foreigners were permitted only where international airports or passenger shipping services are avail- able. The new rules will extend the right to operate casinos to every city and province, in an effort to promote the tourist industry. Korea currently has 13 casinos for foreigners. The cities of Seoul, Busan, Incheon and Gyeongju have one each, with another at Mount Seorak in Gangwon Province and eight on the southern island of Jeju. Mainland Betting Crackdown Mainland Chinese police will join sports authorities in a nationwide fight against online and illegal soccer betting, which has beset the country’s professional league. “We should target those organizers, gamblers, bankers, and peo- ple who induce others to bet, to discipline themwith severe and ruth- less punishments,” said an ominous circular issued by the Ministry of Public Security and State General Administration of Sport. Police and sports officials have been asked to step up Internet sur- veillance to uncover soccer gambling websites and cut off gambling chains, and show no leniency towards overseas gambling groups that have set up illicit booths or offices on the mainland. Severe punishments will also be meted out to those involved in match fixing – through threats or bribes – and soccer players or of- ficials who bet on matches. Galaxy’s Misleading Gain The surge in Melco’s share price boosted other Hong Kong-listed Ma- cau gaming stocks, including Galaxy Entertainment Group and Shun Tak Holdings (an indirect stake holder in Stanley Ho’s SJM), though Melco’s gains have clearly outpaced those of the rest. Melco has proved a great buy, having risen steadily from just over HK$2 in Sep- tember 2004 to touch a 52-week high of HK$19.5 following the sub- concession deal. Galaxy has proved a relative underperformer. On April 11, Galaxy Entertainment Group announced its net profit in 2005 soared 42 times over the previous year,with profit attributable to shareholders growing from HK$56 million in 2004 to HK$2.4 billion in 2005. However, the increase was solely the result of a HK$3.03 bil- lion accounting gain related to the company’s shift from a construc- tion materials producer into a casino operator through a HK$18.4 bil- lion reverse takeover of K.Wah Construction Materials Ltd last year. Contrary to the posted profit surge, Galaxy’s performance has been deteriorating. Even though Galaxy’s sole Macau property had only operated for six months in 2004, revenue for that year reached HK$1.299 billion. In twelve full months of operation in 2005, revenue was slightly down to HK$1.292 billion, suggesting a more than 50% decline in average monthly revenue. Galaxy’s share price – which has been buoyed in recent weeks by unfounded rumours that the compa- ny is in discussions with US casino-giant Harrah’s Entertainment about a possible Macau partnership – unsurprisingly slumped following the announcement of its 2005 results. Possible Venetian Macau REIT According to a report in Hong Kong-daily the South China Morning Post , Las Vegas Sands Corp (LVS) may launch a Hong Kong real estate investment trust (REIT) containing 1.2 million sq. feet of retail space at its upcoming US$2.3 billion Venetian Macau resort in a mall develop- ment replicating the Grand Canal Shoppes mall at its flagship prop- erty in Las Vegas, with high-end stores located along replicas of the famed canals of Venice. LVS announced in April that it had reached commercial terms with 115 retailers who will lease space at its Venetian resort on the Macau Cotai Strip for base rents averaging more than US$145 per sq. foot, with some premium space going for more than US$400 per sq. foot. “The mall itself may be able to be carved out and allocated,” LVS chief operating officer William Weidner told a news conference. “It may be part of a REIT that we might form. Part of it might be mon- etized and the remainder kept within a building group to build more real estate assets.” Venetian Macau’s Vice President for Asian Development Stephen Weaver said:“We think that if we were to take this property to market to sell it or to put it into a REIT or monetize it in any way, the yield that we’re likely to see out of it will reflect the premium quality of the as- sets involved.” REITs have proven a hit commodity in Hong Kong since the No- vember 2005 launch of the government’s Link REIT – the world’s larg- est-ever REIT IPO – which has soared in value since listing. Sing Bids Are In Four consortia submitted bids on March 29 to build and operate Sin- gapore’s first casino along the city’s downtown Marina Bay. The win- ning bidder will be announced by mid-2006 and awarded a 30-year concession to run a 20.6-hectare “integrated resort” (IR) complex that combines gaming with hotel, entertainment, retail and convention and exhibition facilities. The Marina Bay property will be the first of two IRs intended to boost Singapore’s tourism revenues. The most pricey bid comes from the world’s largest casino opera- tor by stock market capitalization, Las Vegas Sands Corp (LVS). LVS is the only solo bidder, and submitted a proposal to invest US$3.6 bil- lion in its Marina Bay property. Dubbed “The Marina Bay Sands,” LVS’ proposal includes 2,500 hotel rooms, 1.2 million sq. feet of convention space and a one million sq. foot retail mall. Investment in the resort would set the record for a gambling complex – currently held by the US$2.7 billion Wynn Las Vegas. The world’s biggest casino operator by scale of properties man- aged, Harrah’s Entertainment Inc, is bidding with a local Singapore partner – state-owned property developer Keppel Land. Also com- ing in with a state-owned local property partner in the form of Capi- taLand is MGMMirage, operator of the fabled MGM Grand,The Mirage and Bellagio. Some believe that by having local partners, Harrah’s and MGMMirage have an edge over LVS, though LVS has also been tipped as a favorite because of its success in developing Las Vegas’ conven- tion and exhibition market – a market Singapore is likely keen to at- tract to the downtown Marina Bay site. The bidding pack has narrowed from the original 12 (with Wynn Resorts and the Melco-PBL joint venture among the last to pull out). The sole non-US bidder is a consortium consisting of Genting Inter- national and cruise ship operator Star Cruises Ltd.The two Singapore- listed firms, both part of Malaysia’s Genting Bhd, said they would in- vest more than US$3 billion in the complex,building a convention hall large enough to hold 5,500 people and a hotel with more than 5,000 rooms. Harrah’s and MGM Mirage did not publicly disclose how much they intend to invest. Genting is seen as a more likely winner for the second IR site, the resort island of Sentosa, for which the government will formally re- quest proposals on April 28. Genting has secured a theme park attrac- tion from Universal Studios in its bids for both the Marina Bay and Sentosa sites. The Harrah’s bid includes a high tech iPort theme park featuring attractions from blockbuster films and a joint marketing agreement with local convention organizer Suntec. LVS’ has enlisted Clear Channel as its entertainment and events partner and plans to build a Guggenheim-themed museum. MGM Mirage’s plan includes bringing in some of the world’s top chefs and a resident Circue du Soleil troupe. City of Dreams