Inside Asian Gaming

January 2015 inside asian gaming 17 Research Macau Managing Partner Grant Govertsen doesn’t believe that’s a big enough edge to drive Melco Crown to divert VIPs from Macau to Manila. “We aren’t necessarily sold that the math works.” City of Dreams Manila is a partnership between Melco Crown Entertainment’s Manila-listed subsidiary Melco Crown (Philippines) Resorts Corporation and Belle Corporation, part of the Philippine conglomerate SM Group, which holds the casino license though a subsidiary. Melco Crown Philippines operates City of Dreams Manila as master lessee of the property. It pays rent to Belle, and they split property revenue based on either net gaming win (gross gaming revenue minus comps) or property EBITDA, according to Belle Executive Vice President and Chief Financial Officer Manuel Gana. Belle chooses either 15% of mass net win plus 5% of VIP net win or 50% of EBITDA with rent added back—“I’m not going to pay for rent to myself,” Mr Gana says—minus a theoretical management fee to the operator of 20% of net win or 7% of EBITDA. “Ultimately Melco Crown owns about 70% of Melco Crown Philippines, which in turn owns about 50% of the economics of City of Dreams Manila,” Union Gaming’s Mr Govertsen says. “We think that VIP profit is probably 20 cents on the dollar in the Philippines versus about 10 cents on the dollar in Macau. Melco Crown would only receive 70% of 50% of that 20 cents, or 7 cents on every dollar of VIP revenue, which is slightly unfavorable relative to Macau. For the economics to make sense for Melco Crown, VIP EBITDA margin would need to be 30% or better, which we’re not convinced will be the case. “The reason that markets like the Philippines (or Korea, or Cambodia, etc.) are able to attract VIP players is that they pay higher commission rates to VIP junkets given that they face a lower tax burden. As such, most of the benefit of having a lower tax on VIP gaming is therefore eaten up by the junkets who are receiving a higher commission rate,” the Macau based analyst says. “Melco Crown can still generate incremental cash flow from the Manila project as some number of customers there will be new to the Melco Crown family and/or these are players who might otherwise have allocated incremental trips to other operators and are now allocating trips to another Melco Crown property,” Mr Govertsen adds. Cover Story Nobu, Hyatt and Crown Towers hotels with a total of around 900 rooms are all due to open by mid-February. The Nobu Hotel in Manila will be the star-studded group’s first in Asia, after Las Vegas and Riyadh. Hyatt began registering guests during Christmas week. Other Manila operators enthusiastically welcome their new rival to town. “The opening of City of Dreams should expand the market. They’ll be bringing in a whole new set of players,” Travellers International Hotel Group Chief of Corporate Planning Patricia May Siy says. “Ultimately Melco Crown owns about 70% of Melco Crown Philippines, which in turn owns about 50% of the economics of City of Dreams Manila,” Union Gaming’s Grant Govertsen says. “We think that VIP profit is probably 20 cents on the dollar in the Philippines versus about 10 cents on the dollar in Macau. Melco Crown would only receive 70% of 50% of that 20 cents, or 7 cents on every dollar of VIP revenue, which is slightly unfavorable relative to Macau.”