Inside Asian Gaming

INSIDE ASIAN GAMING | May 2009 32 from SJM. Cynics might think though that this decision was rather more to do with Crown not being able to sell a potential MPEL-SJM tie up to the Australian gaming authorities (they have threatened to refuse Dr Ho a gaming licence in the past and threatened to explain the reasons publicly) than due to a desire on Dr Ho’s part to see Lawrence Ho fly the family nest. Mass versus elite Dr Ho isn’t having things all his own way in Macau. Challenges still lie ahead for SJM. The company is currently making a virtue out of the fact that around 40% of its turnover is now coming from mass-market players. Mass-market play has a better profit margin than high roller play so that looks like good news. However SJM is making rather less of the fact that the growth of its mass segment means it has actually slipped below the Macau market average of 65% to 68% of the gaming gross ascribed to VIP play. Whether this change has allowed SJM to hit a financial sweet spot and trade VIP volume and thin margins for the mass market’s smaller volume but better margin, isn’t clear. On the evidence of SJM’s results for 2008 the answer is no. Earnings fell by 48% in 2008, to US$103 million, as sales dropped 13%, to US$3.6 billion. That’s just below their level in 2003, the last operative year of SJM’s monopoly. Waiting game It’s a truism to say that Chinese business people think long term and that Western business folk think only of the next quarter or the next financial report. Nonetheless it’s a truism that may offer some useful insight into Macau’s current conundrum. When Dr Ho was given notice in 2002 that he had lost his gaming monopoly, he could have walked away. He certainly had enough personal wealth to do so comfortably. He didn’t walk away. He sat, he waited and he acted where necessary in increments, withmodestly priced projects geared to respond to market events. Perhaps most importantly of all, he had the cultural, linguistic and political advantages of being Chinese and of being the incumbent. The Las Vegas casino operators are not the first group of Westerners to think China’s streets were paved with gold. They are unlikely to be the last. Time will tell whether Las Vegas can impose its cultural and managerial style upon Macau, or whether it can accept a compromise based on the local market and local cultural realities, and thereby help to create conditions where all the participants can prosper in the future. The real challenge as far as the Ho clan is concerned to avoid a bloody succession battle once Dr Ho finally leaves the stage. A civil war may only serve to hand control of themarket over to the overseas investors by default. Numbers Game What price would make it worth LVS’s while to sell off Cotai plots five and six? H ow would an SJM bail out of LVS on Cotai work in practice? In theory nothing can happen without the approval of the Macau government, though given a choice between LVS’s Macau project potentially imploding and Dr Stanley Ho getting a cut price entry into the Cotai market, it seems clear which way the government would jump. Taking the notion of a 40 US cents on the US dollar buy out by Dr Ho of LVS’s Cotai plots five and six as a starting point, can we put any metrics on that possible deal? We know that in January this year Kenneth Kay, Senior Vice President and Chief Financial Officer of LVS, told analysts at a conference call to discuss the company’s Q4 2008 earnings: “The amount spent to date [on plots five and six] is probably, I’m going to guess, in the range of US$350 million.” Valuation Using the 40 cents on the dollar formula, that would give a potential valuation (on bricks and mortar only) for plots five and six of US$140 million. One doesn’t need to be a cynic to understand that the valuation of a project when presented to financial analysts as a cost is likely to be significantly discounted compared to when that same project is presented to a potential buyer as an asset. Nonetheless unless other suitors come to LVS’s table, Dr Ho can reasonably expect to drive a hard bargain. The cost pro rata of the 25-year land lease granted by the Macau government to LVS for its Cotai site is also likely to be factored in to the calculations. So in all likelihood would a premium to reflect the fact LVS has already done significant spade work and above ground work in developing plots five and six. In the same earnings call, Mr Kay said a worst-case scenario for LVS’s financial commitments on plots five and six was US$880 million. Using the 40 cents on the dollar formula that would present SJMwith a price tag potentially of US$352 million. Given though that LVS’s long term global debt stood at US$10.8 billion as at 31st December 2008, even an asking price of US$500 million might not be enough to help LVS stave off debt default Cover Story