Inside Asian Gaming

INSIDE ASIAN GAMING | October 2008 24 Galaxy Results G alaxy Entertainment Group has written down the value of its Macau gaming licence by approximately HK$7 billion in a one-off move. The move accounted for most of the net loss of HK$7.43 billion Galaxy recorded for the first half of 2008. Although recorded as a book loss on the asset side, the write-down effectively means the company is being forgiven some of the debt owed to its founder and controlling shareholder, property and construction entrepreneur Che-woo Lui. In 2005, Galaxy did a deal to pay Dr Lui HK$18.4 billion (US$2.37 billion) for the licence. This is more than twice the US$900 million Melco Crown Entertainment paid Wynn Resorts for a gaming sub concession in 2006 and more than 11 times the US$200 million MGM Grand Paradise—the privately held joint venture between MGM Mirage and Stanley Ho’s daughter Pansy—paid Dr Ho’s casino operating company SJM for a sub licence in 2005. The Lui family acquired the licence for free from the Macau government in February 2002, as part of a now defunct joint-venture bidding consortium with Las Vegas Sands Corp. Galaxy has been amortising the licence purchase price over the life of the permit, which in theory runs until June 2022. The payments would therefore have been equivalent to around HK$1 billion a year for the next decade and a half, acting as a drag on Galaxy’s balance sheet and making it hard for the company to turn a net profit in the foreseeable future. Delivery of dividend has become a more pressing matter since the UK-based private equity company Permira Advisers took a 20% stake (then valued at US$838 million) in Galaxy last year. Francis Lui Che-woo, president of Galaxy, said in a statement reported in the local media that the licence write-down would shave HK$600 million (around 60%) annually from the licence payment instalments. Competition and commissions also bite The write down tells only part of the trading story for the first half of 2008. The Group’s revenue for the half year was HK$5.39 billion, down from HK$6.33 billion in 2007, reflecting what the company said was the increased competition in the Macau gaming market, particularly within the City Clubs sector. Earningsbeforeinterest,tax,depreciation and amortisation (EBITDA) fell by half to HK$356million,fromHK$737million in 2007. The company blamed rises in commission rates paid on VIP turnover for much of the reduction. StarWorld’s half year EBITDA was HK$295 million,with an EBITDAmargin of 8.4%under Hong Kong accounting standards, which the company said were stricter than US GAAP standards. Since the Permira deal, Galaxy has experienced four straight quarter-on-quarter declines in EBITDA. Nevertheless, Francis Lui said that with the advent of a 1.25% cap on VIP chip commission rates expected soon from the government, he anticipated better trading conditions in the latter part of 2008, into 2009. He added that Galaxy StarWorld’s offer was being enhanced by new product including a new ‘Jumbo’ VIP facility with up to 100 tables on the third floor of the casino. Under an agreement with Hong Kong- listed Neptune Group Ltd, Neptune’s promotion partner Lucky Star will provide VIP customers for the venue. Dr. Che-woo Lui said in a statement released with the results: “The first half of 2008 experienced a slowing global economy and continued financial market instability.At a local level,visa restrictions intoMacauwere introduced as part of broader measures to control the growth of the gaming industry. “We are focused on continuing to grow our gaming and entertainment business, as demonstrated through the enhancement initiatives being undertaken at StarWorld and our development at Cotai.” “The first phase of the Mega Resort Double Impact Galaxy’s first half loss is largely driven by a write-down in the value of its Macau license, but falling revenue and shrinking margins also take their toll Rendering of Galaxy Cotai Mega Resort