Inside Asian Gaming

14 Feature Perhaps the most important and painful lesson LVS and the other American operators have learned in Macau is that it’s hard if not impossible under current economic and political conditions to break the grip of the independent agents on the Macau VIP market, which accounts for 70% of all casino revenues. With China’s currency currently non-convertible in retail money markets, restrictions on cross- border movement of cash, and gambling debts not recognised by Chinese courts as legally enforceable contracts, the facilitation of VIP play in Macau and control of credit was always going to be reliant on the highly personal and generally confidential relationship between VIP agents and players. This doesn’t mean the status quo in the Macau VIP sector will be maintained indefinitely. As China develops economically and more wealthy Chinese citizens gain access to foreign bank accounts denominated in hard currency, the need for local VIP agents facilitating cross-border credit may recede, even if the renminbi remains non-convertible for the foreseeable future. LVS and some of the other American operators already claim to have close business relationships with Chinese ‘whales’ who regularly fly out to Las Vegas. LVS has reportedly bought a wide- bodied commercial jet with the aim of running an in-flight casino between Asia and the Nevada gambling city. As far as globetrotting Asian VIP gamblers are concerned, the term ‘Chinese’ covers a multitude of meanings, from nationality through to ethnicity, culture and language. It may be that most of these Las Vegas visitors are what are sometimes referred to in Asia as ‘overseas Chinese’ (i.e., ethnically and culturally Chinese, but part of the Chinese Diaspora rather than citizens of mainland China). Even if some of them are domiciled in China, they must by definition have access to liquidity outside China denominated in hard currency in order to acquire credit in US casinos. The Long View LVS speculates to accumulate The VIP Revolution That Wasn’t Early LVS optimism on shaking up the junket model gives way to pragmatism It’s quite possible that in a few years, when the Cotai project is bedded down, everyone will have forgotten about the drag the capital expenditure on infrastructure put on the business. Nonetheless, in a global investment market with shorter and shorter profit cycles and currently bearish sentiment, even a successful brand such as LVS can only go so far in testing the nerve and patience of shareholders. Confidence is everything, as investment bank Bear Stearns found out after its losses in the sub-prime mortgagemarket.Pass a tippingpoint on the scale of investor confidence and people start scrambling for the lifeboats. LVS isn’t sinking and no one is even thinking about jumping in a gondola. Still, Mr Adelson was careful at the recent Q2 2008 earnings conference call to make clear he was good for the money, even if he came up short of actually issuing a personal guarantee to bankroll the project from his own fortune. Returns As the gaming operator with most exposure to new infrastructure development in Asia, LVS is arguably well positioned to make some of the best returns in the region in the medium to long term. In the short term, however, LVS stands to take the biggest hit to its bottom line. The double whammy of rising operating and construction costs in Macau and Singapore fuelled by wage escalation and commodity inflation, plus a slow down in consumer spending in its home market in the US, has contributed to the burden. Fortunately there is no sign yet of a triple whammy—a recession in mainland China sparked by a fall in Western demand for Chinese- made consumer goods. At last count, mainland China’s passionate gamblers made up nearly 60% of all the visitors to Macau. Venetian Macao