Inside Asian Gaming

September 2015 inside asian gaming 15 Ambrose So Executive Director and CEO SJM Holdings Chairman Sociedade de Jogos de Macau The collapse of Macau’s high roller market is hitting VIP-centric SJM Holdings particularly hard. The 18-casino group and, more pointedly, its flagship, Grand Lisboa, underperformed the triple-digit decline in citywide gaming revenue in the first half of 2015, and by fairly significant margins. Average daily visitation to Grand Lisboa was down 24% in the six months ended 30th June. Hotel occupancy fell sequentially by more than 12%. It has plunged nearly 16% since the first half of 2014. And analysts expect these trends will persist as the company wrestles with the space constraints of a core operation confined to the Macau peninsula and the lack of a diversified resort offering that can compete with Cotai for the mass-market tourist and player. The challenges CEO Ambrose So and his executive team face in their efforts to realign the business in accord with this “new normal” are unique in some other key respects: As the only native Macau operator, the successor to the monopoly founded by Stanley Ho half a century ago, SJM is more representative than its competitors of a classic Chinese partnership model that has evolved to the point where nowadays more than half of corporate revenues are derived from third-party casinos bound to it by various licensing agreements but over which SJM exercises little operational control. Going this route may have been sound strategically back when Mr Ho was looking to generate a lot of scale quickly to counter the foreign competition that was coming his way after the market was liberalized at the start of the last decade. And certainly it accelerated Macau’s expansion and contributed to its meteoric ascent in global revenue terms. In today’s down market, though, investors find it increasingly perplexing. Addressing this in his analysis of a second quarter marked by a 55% year-on-year decline in group EBITDA on gaming revenues that were down 44%, Sanford Bernstein analyst Vitaly Umansky wrote: “In the long-term, we believe SJM will continue to trade at a valuation discount to its peers due to its over-reliance on VIP and satellite business, conflicts of interest, complicated shareholder structure and governance concerns.” The monopoly era has left the company with another thorny legacy: It still depends on gaming for more than 98% of total sales. This is high even by Macau standards. It doesn’t leave a lot of room for counter-punching in response to the market’s current troubles. As a protégé of Mr Ho’s whose involvement in the business spans the better part of its history, Mr So certainly is aware of the limits to his maneuverability. He joined SJM’s predecessor, STDM, just three years out of university and was a long-time director of Mr Ho’s Shun Tak conglomerate. He has been a director and senior manager at SJM since its founding at the end of the monopoly era. He was named an executive director in 2006. Since then the responsibility for overall management and strategic execution has been his, and to his credit and that of his team he is maneuvering. Since the first quarter, management has added 26 table games to its mass-market inventory and reduced its VIP stock by 38. As of 30th June, the company was operating 40 more mass tables than it was at the same time last year. Since the first half of 2014, Grand Lisboa, which accounts for only 22% of group mass-market revenue, has pared the number of VIP tables by almost 11% on average and boosted its mass inventory by 5%. A lot more will be accomplished in this area when a HK$655 million renovation of Casino Jai Alai is completed the middle of next year after being stalled since February 2014 in the government approvals process. The property, located at the Macau Ferry Terminal and directly operated by SJM is slated for 45 table games (all of them likely mass-market tables), 130 hotel rooms and a fresh collection of shops, restaurants and cultural attractions. Together with its adjoining Casino Oceanus, which SJM also controls, the mass offering at the terminal will total some 225 tables. Grand Lisboa, in the meantime, is steadily reducing the number of hotel rooms allotted to junkets and freeing up more of them for rated cash players. They comprised 40% of total occupancy in the second quarter. The company is targeting that to rise to 60% in the third quarter. The company also has managed this year to find HK$50 million in cost-efficiencies, no easy task given the marginal nature of the non- gaming business. Normal staff attrition is being relied on to achieve most of this, supplemented by a voluntary program of unpaid leave instituted at the start of the year and cuts in other areas. A sterling balance sheet has been another hallmark of Mr So’s tenure. At the end of the first half of this year, cash, bank balances and pledged bank deposits totaled HK$22.82 billion (US$2.93 billion). Lastly, of course, there is Cotai waiting in the wings. The