Inside Asian Gaming

12 Field of Dreams ‘Build it and they will come’ Slash and Earn LVS outlines its cost cutting drive for Cotai One of the premises for the LVS Cotai project was that there was a near inexhaustible demand from Chinese and other East Asian consumers for mass-market gaming and leisure activities and for business conferences. This latent market was not being served by Stanley Ho’s casinos, with their emphasis on VIP room gaming revenue, went the thinking. Macau’s gaming revenues rose 52% in the first half of 2008 compared with the same period in 2007, undoubtedly stimulated by the novelty of extra supply in the market, word of mouth and the first effects of large scale marketing on the Mainland. Mr Weidner told the LVS Q2 earnings call: “Over 20 million visitors have experienced The Venetian Macao since it opened approximately 11 months ago, including over 100,000 visitors last Saturday and Sunday. July visitation at the Venetian is on track to be up over 28% over June. This significant visitation increase is directly correlated to the six-fold increase in ferry passengers utilising our COTAIJet™ service [docking next door to Macau International Airport on Taipa] to visit the Cotai Strip.” Investors needn’t doubt the passionate commitment of Chinese people to gambling in all its forms. It’s likely, however, to take time to build a general tourism market among consumers unfamiliar with the integrated resort product. Down side There are also political risk factors regarding the rationing of Macau visitor permits to mainland Chinese citizens. VIP gamblers—perhaps because of better political connections than their mass-market countrymen or because of the need to travel for business—may have greater freedom to come and go across the borders of the two Special Administrative Regions of Macau and Hong Kong.Whatever the reason for the buoyant performance of the VIP market,it seems unlikely Macau’s centre of business gravity and revenues will move away from VIP gaming and towards predominantly mass market leisure and entertainment any time soon. VIP gaming as a proportion of gross revenues has actually been going up, though that needs to be seen in the context of a Macau gaming pie that is growing all round. Twin track The growth of the mass market is therefore more likely to be complementary to the VIP sector than built at its expense. Given the tight margins and level of competition in the VIP sector and (for the time being at least) the relatively high fees demanded by local agents and their aggregators to deliver VIP players to the tables, LVS may be on firmer ground in trying to strengthen its mass appeal. Mass market tables, with minimum bets in hundreds of Hong Kong dollars and no middle men demanding a cut, currently offer lower volumes but better margins than VIP play. Macau’s slot machine revenues are still a small fraction of overall revenue, but slots have economies of scale in terms of remote controlled electronic management without the tiresome overheads associated with tables (such as the need to hire scarce and highly-paid Macau residents as dealers). Just one modestly paid Filipino attendant can potentially serve scores of slot players. Until the benefits of building the mass market have fed through to the bottom line and the effects of amortisation and depreciation on new construction have receded, LVS has decided, like Mr Micawber in Victorian London, to tighten its belt a little. Attacking its Cotai overheads is a worthwhile exercise. LVS estimates it can save US$70 million carried over on an annual basis principally by more efficient use of existing staff on Cotai. Given the enormous sums involved in providing infrastructure, cutting operational overheads may be as much about reassuring investors that management has a firm grip on proceedings as it is about making a serious contribution to the bottom line. LVS says cost cutting has already helped The Venetian Macao’s operating profit margin rise to 16.9% in Q2 2008 from 12.5% in Q1. Future savings identified include redeployment of staff from The Venetian Macao to the soon-to-open Four Seasons Hotel Macao next door. Targeted savings Responding to a question from Bill Lerner at Deutsche Bank Securities during the LVS Q2 2008 earnings conference, Robert G. Goldstein, President of The Venetian and The Palazzo, addressed the risk of cost cuts having a negative impact on revenue earning potential:“Well,obviously there’s always going to be some revenue risk. The goal is to cut the fat and not the muscle.We’re not going to do layoffs here. That’s not in the vocabulary. The idea is cost containment on the labour side, through freezes.We have a hiring freeze in place currently. It is downsizing some hours where we think we can do without off hours [for staff]. “It’s just being more judicious in our spending and paying attention to every corner of the building. This is a big building. There’s 10,000 restaurant seats. There’s 7,000 plus rooms. There’s a lot that goes on here. We’re just trying very hard to be really, really focused on every area we can save money,from the package centre to the purchasing to our light bills, etc.” Although such savings are a drop in the ocean compared to the US$12 billion capital expenditure for Cotai as a whole, anything that goes to improve the quarterly bottom line and makes the light shine brighter at the end of the Macau tunnel will be welcome. Feature