Family Values

Is the Ho clan on the rise again?

Not only is there a possibility of Dr Ho getting into bed with LVS, but Dr Ho’s daughter Pansy could be well placed to grab a bargain if a struggling MGM MIRAGE decides it must ditch its interest in the chic but under-performing US$1.3 billion MGM Grand Macau. MGM MIRAGE has never looked as comfortable out of its natural North American habitat as Wynn or LVS. Selling its 50% stake in MGM Grand Macau could be judged by MGM MIRAGE as a price worth paying in order to save its coveted CityCenter project in Las Vegas. That scenario looks more possible now that a subsidiary of Dubai’s sovereign wealth fund has kissed and made up with MGM MIRAGE regarding its continued bankrolling of the CityCenter scheme. MGM Grand Macau has not yet reached operational break even, so Ms Ho is unlikely to be in any rush to make MGM MIRAGE an offer on its Macau investment. She can probably afford to sit and wait.

Sons and heirs

The ‘Ho Factor’ in Macau also includes a significant contribution from one of Dr Ho’s sons Lawrence Ho, the Co-Chairman and Chief Executive of Melco Crown Entertainment (Nasdaq: MPEL). This joint venture with Australian casino developer and operator Crown Ltd is seeking via its new integrated resort property City of Dreams on Cotai to build further MPEL’s VIP market share from the already healthy foothold created by Altira (formerly Crown Macau).

Family ties shouldn’t however be overstated in modern business. Dr Ho did after all give his personal blessing to his son when MPEL decided to pay Steve Wynn US$900 million for a Macau gaming sub licence in March 2006 rather than ‘keeping it in the family’ and seeking a sub licence 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, with modestly 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 the market over to the overseas investors by default.