The X Factor

LVS’s future strategy on its Cotai projects will have significant impact on the economy

Goldman Sachs points out that all projections on Macau’s gaming market in the net few years depend on how LVS decides to play things. The investment house offers three scenarios and their potential impacts: indefinite suspension; quick resumption and restart in 2010.

The ‘indefinite suspension’ scenario

“City of Dreams (COD) will be the only large-scale casino on schedule for opening in mid-2009, underpinning MPEL’s market share gain from 14% in 2008E to 17%/22% in 2009E/10E,” says the report.

“Given less table supply from LVS, Wynn may be better off and able to attract non-Chinese players from elsewhere in the region, in our view. We believe Galaxy and SJM may not be key beneficiaries, however, as they may need additional funding for their future expansion plans,” adds the report.

Goldman Sachs says under the scenario, around 14,700 new jobs would be created in the next three years, creating demand for approximately 3,700 housing units, though the investment house projects a 30% decline in Macau’s property price by end-2009E, which would have a negative impact on property developers, including the conglomerate Shun Tak, which also operates the majority of Macau’s ferry services.

The ‘resumption as soon as the money comes’ scenario

“We believe this is possible as LVS has already spent US$1.2 billion in the construction of Shangri-La and Sheraton (in addition to the US$880 million in contractual obligations to suspend the projects). However, it is difficult to estimate when this scenario would become possible as it is dependent on the availability of funding and investors’ appetite in gaming stocks, in our view,” says Goldman Sachs.

If the projects were to resume, at the earliest possible opportunity, says the report, it would create 31,821 jobs in long-term casino and hotel employment from the Shangri-La and Sheraton projects alone; as well as boosting the general economy in terms of creating demand for support services and potentially increasing tourist numbers, especially if the transport infrastructure improves.

The ‘projects resume in 2010’ scenario

“If we assume that LVS were to resume its projects in 2010, we believe this would have negative implications for MPEL and Galaxy,” says the research document.

“For the former, its COD project would face greater competition in Cotai, putting pressure to fulfill the covenants related to its financial performance (which become applicable by 2010). For Galaxy, it may become more difficult to ramp up the performance of Mega Resort, when it is opened in 2010. Other major players like SJM may also face more pressure to close down the smaller casinos, as we have seen over the past year. On a positive note, we believe this scenario would benefit property developers such as Shun Tak,” adds the report.