Inside Asian Gaming

INSIDE ASIAN GAMING | January 2009 22 Market Outlook earnings over the near term remains uncertain, in our view,” says Deutsche Bank’s Karen Tang. AlthoughGrandWaldo has facilities that compare favourablywith the foreign operators, it has suffered to some extent from its location, being on the border between Taipa and Cotai but physically isolated from the growing buzz factor of the Cotai Strip™ by a piece of no man’s land. While visitors to Las Vegas Sands Corp’s Venetian Macao and Four Seasons Macao properties will soon have the option of making a short walk to Melco Crown Entertainment’s City of Dreams site if they want fresh entertainment options, anyone wanting to go to the GrandWaldomust take a taxi or make a ponderous and circular 10-15-minute journey by foot using the local vehicle service roads. Job cuts Even before the global financial disaster, Galaxy was laying off workers at its CityClubs. In the first round of redundancies the company cut 140 mid-level foreign workers at the Grand Waldo and President casinos. Then, in July, Galaxy let go of 270 local casino staff, mostly dealers. While there may have been solid commercial reasons for the decision, it attracted a lot of negative publicity and censure among legislators. The fallout was so great, in fact, that it appears other operators seeking to cut costs in the downturn are effectively protecting local employees from redundancy, regardless of their qualifications or competency. On the plus side for CityClubs, the A-Max inspired junket commission price war seen across the market in the first half of 2008 now seems to have abated. Anecdotally, it appears that the net effect of that price war was to push up junket commission rate averages across Macau, which must inevitably have put further pressure on any VIP venues that were already underperforming. Light in the tunnel? During 2009, Galaxy will need to show investors that it has turned the corner with CityClubs and re-established the business model for the unit on strong foundations even if it cannot immediately return them to profit. One method will be to expand the volume of VIP turnover, although as Karen Tang points out, this is a big ask during a regional economic slowdown and credit crunch. Another method is to dramatically cut costs. Galaxy may try to follow the formula adopted by SJM to improve the efficiency of its legacy properties. “For self promoted casinos, it [SJM] will reduce the dealer-to- table ratio to lower labour costs; 2) For third party-promoted casinos, it will increase its revenue share, or reimburse more expenses; 3) For VIP operations, it will consolidate underperforming VIP rooms,” says Ms Tang of Deutsche Bank in her report on SJM issued before Christmas. “We estimate that cost savings [to SJM] could amount to HK$280 million,” she adds. If such measures are impractical for Galaxy’s legacy properties, then the company could as a last resort seek government approval to sell one or more of the CityClubs to an outside promoter to run as a cheap and cheerful junket venue. But the property would need to operate under a licence from Galaxy or one of the other existing operators or sub-operators. Galaxy cannot sell on a sub-licence, as that went to LVS as a compromise deal organised by regulators when the original plan to pair Galaxy with LVS in a joint venture in Macau fell through. One thing seems sure. With the opening of Galaxy’s new Cotai integrated resort now put back to 2010, Galaxy must be wary of reducing its already slender footprint in a highly competitive VIP market. Grand Waldo—so close, yet so far away from the Cotai Strip Progress update on cost rationaization initiatives Source: SJM company presentation