Inside Asian Gaming

INSIDE ASIAN GAMING | Oct 2007 36 M elco International (MI) is attempt- ing to leverage its business and cultural ties within Asia by build- ing a leisure and tourism business in Main- land China’s rapidly growing domestic mar- ket. Such a move is apparently designed to complement the company’s Macau casino operation done jointly with Australia’s Pub- lishing and Broadcasting Ltd. It could offer the kind of unique investor value proposi- tion that has so far been lacking from Melco PBL Entertainment (MPEL). One of the businesses Melco mentions at some length in its half year results state- ment to 30 June is Melco China Resort. As at March 2007, the company was 45% owned by Melco. MCR’s aim is to identify and de- velop ski resorts in China, and Melco is con- vinced that newly affluent Chinese domestic tourists will flock to ski resorts as eagerly as Westerners.Although the subsidiary showed an on-sheet loss of HK$2 million in the first half of 2007, this is attributable to develop- ment costs. Melco believes the market could deliver strong value in the medium to long term. The company states in its results report: “MCR has identified the largest and most ex- ceptional portfolio of irreplaceable, existing ski resorts with the best mountains, location advantages, dominant market positions and healthy expansion potential.” Melco says initial projects include a re- sort at Harbin in Heilongjiang Province, two in Jilin Province and another one close to Beijing. The company’s Executive Director Frank Tsui indicates the initial investment will be US$120 million. Melco adds: “Working with the world’s foremost industry experts, MCR plans to deliver world-class year-round ski resort ex- periences to patrons in China comparable to Ski resort in China. Photo courtesy of Marc van der Chijs Downhill Racer Melco’s half-term report stresses investments in China’s growing tourism market those of Canada, the US and Europe.” Casino ops reviews MPEL’s casino operations have had mixed reviews from financial markets re- cently. Hong Kong-based analysts tend to be the most bullish on its prospects, while acknowledging the MPEL business model may produce lower returns on invested capital (ROIC) in Macau than some of the rival operators. Research from Deutsche Bank suggests the more modestly priced and less aggres- sively geared Macau projects are proving to be the most capital efficient, with a proven linkage between short pay back periods and ROIC performance. Australia-based analysts seem to be the most sceptical about Macau and nervous about PBL’s decision to move away from its traditional base in low-growth Australian media and seek higher growth in develop- ing gaming markets. JP Morgan gaming analyst Rebecca Michele was recently quoted in the Sydney Morning Herald saying she was “increasingly concerned” about the US$255 million Melco and PBL paid for what is known as the‘Macau Peninsula Site’, on which the partners plan to build their third casino. Future flows Melco’s diversification into China tour- ism could deliver the sort of cash flows and price to earnings ratios that MPEL appears to have so far missed out on in Macau gaming. MI’s fortunes in the next few years are DB projected profitability for new casino property Casino/Resort Owner Opening Capex 1st 12 month ROIC Payback period (US$m) EBITDA (US$m) Macau Sands Macau Las Vegas Sands May-04 265 285.3 108% 0.9 Wynn Macau Wynn Resorts Sep-06 700 292.6 42% 2.4 StarWorld Galaxy Entertainment Oct-06 325 153.3 47% 2.1 Crown Macau Melco May-07 585 114.5 20% 5.1 Venetian Macao Las Vegas Sands Aug-07 2,500 644.2 26% 3.9 MGM Grand Macau MGM 4Q-07 1,100 146.9 13% 7.5 GalexyWorld Resort (Phase I) Galaxy Entertainment 2008 610 135.3 22% 4.5 City of Dreams Melco Apr-09 2,800 311.4 13% 9.0 Average for those opening in 2007 and beyond 18% 5.5 Singapore Marina Bay Sands Las Vegas Sands 4Q-2009 3,600 507.0 14% 7.1 Resorts World Sentosa Genting 1Q-2010 3,467 549.5 16% 6.3 Average for Singapore 15% 6.8 Sourse: Deutche Bank Melco Results