Inside Asian Gaming

INSIDE ASIAN GAMING | January 2009 28 as we believe Galaxy may have to suspend construction in Cotai,” explains Ms Tang. In November, Galaxy described the decision to delay the opening of its Cotai integrated resort as a “tactical response to wider market conditions”. This was widely interpreted as a coded reference to the negative impact on Macau’s gaming revenues of China’s visa restrictions and of a regional economic slowdown influenced by the recession in North America and Europe. Ratings scrutiny Deutsche Bank isn’t alone in its scepticism regarding the state of Galaxy’s project funding. Moody’s Investors Service said in late November that GEG’s gaming unit, Galaxy Casino SA, was having its B1 corporate family rating and senior unsecured debt rating put under review for possible downgrade because of the company’s decision to delay the opening of the Cotai project. Moody’s analyst and Assistant Vice President Kaven Tsang explained that while the delay could lower Galaxy’s overheads and spread out its capital outlays to some extent, it will also reduce cash flow. “As a result, Galaxy’s key financial metrics will remain weak for the next two years and this situation could pressure its ‘B1’ ratings,” added Mr Tsang. The essential concern for analysts is that despite a positive showing from StarWorld, Galaxy’s flagship property on the Macau peninsula, the company has had some difficulty gaining traction in the Macau gaming market in order to produce the kind of revenues that will allow rapid pay back on its project debt and on its amortised gaming licence fee (though HK$7 billion of the latter debt owed to the company’s founder was effectively written off late last year). Underwhelming Galaxy found it tough going in the Macau gaming market in 2008, even during the bullish first half of the year where the territory’s gaming revenues saw unprecedented 50% year-on-year growth. StarWorld, Galaxy’s Macau peninsula flagship, has had positive reviews from the public.Itmanagedtocapturearevenueshare of around 6% of the entire Macau market all by itself soon after opening. However, it has been treading water since then and could do no more than hold its 6%market share in Q3 ‘08, points out Deutsche Bank. In the context Market Outlook of the soaring growth of the Macau market in the first eight months of the year, that has to be viewed as underperformance. StarWorld’s Q3 ’08 revenue was up 2% quarter-on-quarter to HK$1.71 billion. VIP rolling was up 12% quarter-on-quarter to HK$19 billion per month, representing a table hold of 2.2%, pointed out Deutsche Bank. The venue’s mass table win was up 5% quarter-on-quarter toUS$4,400 per table per day. DB adds StarWorld broadly maintained a 6% market share in Q3 ‘08, with earnings before interest, taxation, depreciation and amortisation (EBITDA) up 21% quarter- on-quarter to HK$136 million. DB adds the property enjoyed a slight expansion on margin from 7% in Q2 ’08 to 8% in Q3 ‘08. But some of the company’s other assets have performed less well. At group level, Galaxy’s building materials unit has been hit by the rising cost of commodities and the rising cost of bulk transport. And as we explain elsewhere in this edition, Galaxy’s CityClubs in particular have struggled to establish a niche audience and a clear marketing identity in the VIP market. That will need to change if Galaxy is comfortably toweather the roughconditions widely expected in 2009. Galaxy Entertainment Group performance indicators Source: Deutsche Bank Spin Doctors Macau casino executives are seeking to put the best gloss on tough market conditions The possible scenario of Galaxy being forced to suspend work on Cotai would have seemed shocking just a few months ago. Given what’s been going on in the Macau market since the final quarter of 2008, it now looks perfectly rational—normal even. In any case, since Las Vegas Sands Corp’s decision to halt work on its new Cotai projects in November, few events retain the power to shock. The terms ‘phased opening’ or ‘soft opening’, when applied to one of Macau’s new integrated gaming resorts,usedtobeacceptedbyindustry observers as a practical solution to a genuine logistical problem—i.e., how to organise the smooth transition of a massive project from building site to paying attraction. Now, following the global meltdown of debt and equity markets, ‘phased opening’ seems to be a term used increasingly to cover the backs of casino executives as they scramble to meet their massive capital commitments in order to avoid having their stocks and bonds classified as junk because of missed payment deadlines on debt. An awful lot of casino executives were busy in the final weeks of 2008 making a virtue out of necessity, with phrases such as “realignment with existing market conditions” to explain away their embarrassment on funding. Such talk may not be entirely self- serving. A consensus view appears to be forming that oversupply of product in an immature market has been at least one contributing factor to Macau’s current woes. The spectre of the global credit disaster does, though, continue to cast a long shadow over the Macau gaming market and Asian gaming markets in general.