Inside Asian Gaming

n July 2004, Hong Kong-listed Galaxy Entertainment Group became the second new casino licensee to begin operating in Macau following the end of Stanley Ho’s 40- year casino monopoly in 2002. Galaxy’s Wal- do Casino featured a mere 38 gaming tables and 150 slot machines at opening, and paled in comparison to the first new foreign-oper- ated casino, Las Vegas Sands Corp’s Sands Macau, which opened two months earlier with its spacious and glitzy gaming floor fea- turing 277 tables and 405 slots at opening. Sands Macau now has over 700 tables and 1,254 slots. In contrast to the market-revolutionizing Sands Macau, Waldo was hastily converted from an office building. Still, its concentration on VIP gaming enabled Waldo to outgross Sands Macau in its first months of operation. Galaxy’s fortunes reversed drastically in 2005, however, as Sands Macau began courting VIP customers, taking a big bite out of Waldo’s Galaxy Rises Again StarWorld is Galaxy Entertainment Group’s fifth casino in Macau, but the first property the company actually owns in the city. StarWorld will show whether Galaxy is right to claim it better understands the sensibilities of local gamblers than its US rivals share of the business, and driving up junket commissions, which further ate into the Gal- axy’s profits. Furthermore, Las Vegas Sands Corp owns Sands Macau, but the Waldo property is not owned by Galaxy and sees the company re- tain a mere 4% of gross gaming revenue, ow- ing to the large commissions offered to jun- ket operators to bring VIP players to Waldo. Sands Macau also offers hefty commissions on VIP play, but retains over 60% of revenue from its mass gaming tables. The standard breakdown of VIP revenue is known as the 40/40/20 model – pioneered by Stanley Ho’s SJM – and generally sees the concession holder receive around 20% of gross gaming revenue, while the govern- ment receives 39% as gaming tax (35% as direct tax, and an additional 3-4% as com- pulsory social and welfare contributions). The VIP room operator takes around 40% of gross gaming revenue fromwhich a distribu- tion needs to be made for commissions. In Waldo, the bulk of revenue is gener- ated in the VIP rooms, with the room op- erators taking over 39% of gross revenue. An important variation is that Galaxy pays 12% of revenue to the Waldo Hotel for rent of the hotel/casino operation and for being responsible for the overall marketing of the operation. Other charges bring Galaxy’s take of revenue at Waldo to a mere 4%. Galaxy’s star resumed its ascent follow- ing the opening of three further Galaxy-op- erated casinos in 2006 – Rio, Grand Waldo and President. As with Waldo, none of these properties is owned by Galaxy, and sees the company retain an average of 6-7% of casino revenue. Keeping More Galaxy is headed by Hong Kong construc- tion tycoon Lui Che Woo, who said the three additional properties almost tripled Galaxy’s share of Macau casino revenue to 20% in Au- gust from 7% in January. On October 19, Galaxy opened its fifth property, the US$385 million StarWorld,which is the first property Galaxy actually owns. Gal- axy will therefore retain a much higher pro- portion of casino revenues at StarWorld than at its four so-called city clubs, especially since the StarWorld targets bothVIP andmass gam- ing, whereas the city clubs focus primarily on VIP play. Mass gaming is rapidly growing in importance in Macau,with main-floor gaming only contributing 23% of the city’s casino rev- enue in 2003, but 37% in 2005. StarWorld’s casino offers close to 300 gaming tables, including 200 mass gaming tables, and 371 slot machines. The property features a 34-storey hotel offering 500 rooms, and the exterior boasts a huge LED wall that creates a stylish shifting pattern of lights on the building’s exterior – a marked departure from the gaudy neon that dominates the ex- teriors of the city clubs. StarWorld also offers the usual range of entertainment and leisure facilities available at a five-star hotel. With StarWorld, Mr Lui believes Galaxy could further raise its market share to 25% of Macau casino revenue, and start to develop its non-gaming revenues. Mr Lui points out that with 95% of visitor arrivals to Macau hail- ing from Asia, Galaxy has a distinct edge“as a company owned and operated by Chinese,” giving it a better understanding “of the spe- cific tastes of Asians for hotel, entertainment and dining.” In July and August, prior to the opening of StarWorld, 90% of gaming revenue from Galaxy’s casinos came from the VIP segment according to calculations by CLSA,giving Gal- axy a 30% market share in the VIP segment (assuming this segment accounted for 60% of industry revenue in these two months). According to CLSA, “this demonstrates the strength of local operators over US ones, as the latter are governed by the more stringent regulations in their home country, as well as Galaxy being a key competitor to SJM in the VIP segment.” Local Sensibilities Galaxy believes its local experience and af- fordable prices will secure it a niche and per- haps even an edge over foreign casino op- erators in the booming Macau tourism and gaming market. StarWorld aims to provide what Galaxy refers to as “affordable luxury,” adhering to the company’s concept of an “Asian price point.” According to Galaxy CEO Anthony Carter: “This is not Las Vegas; Asians want to gamble, not go shopping or see Celine Dion shows. That will come in due course. But right now I just don’t see that the demand for these new facilities the Americans are building will meet the cost.” Mr Lui further asserted that with 95% of visitor arrivals to Macau hailing from Asia, Galaxy has a distinct advantage because it “understands the specific taste of Asians for hotel, entertainment and dining.” For their part, the US operators deride Mr. Carter’s assertion that their offerings will be too expensive for mainland Chinese. Steve Wynn responded: “To look at the high level of shopping and consumer taste in Shang- hai and Hong Kong and still suggest that the Chinese won’t care about luxury is a ridicu- City Clubs VIP tables Mass tables Focus Hotel rooms Opening date Waldo 43 20 VIP n/a Jul 04 Rio 15 75 VIP/mass n/a Feb 06 President 20 55 VIP/mass n/a Apr 06 Grand Waldo 68 100 VIP/mass n/a May 06 Own Properties VIP tables Mass tables Focus Hotel rooms Opening date StarWorld 90 200 VIP/mass 500 Oct 06 Cotai Mega Resort 50 550 Mass 1,500 1H08 Source: CLSA, from Galaxy Entertainment Group Galaxy’s City Clubs and Own Properties 6 7 I “The property features a 34-storey hotel offering 500 rooms, and the exterior boasts a huge LED wall that creates a stylish shifting pat- tern of lights on the building’s exterior” StarWorld Hotel lobby