Critical Mass

Cotai in the next five years

What are the prospects for Cotai 2.0, following on from Galaxy Macau and LVS’ Cotai five and six? Steve Wynn said in April when he visited Macau for the opening of Encore at Wynn Macau, that construction on a Wynn Cotai project could begin as early as next year, for a possible opening before the end of 2013.

But the piece of land currently reserved for Wynn could hardly be described as the best position on Cotai. While it has the benefit of being close to Macau International Airport, it is well off the Strip, tucked behind City of Dreams, MGM’s plot and LVS five and six.

What about Macao Studio City?

Potentially a pivotal issue for Cotai 2.0 will be what happens to the Macao Studio City site. This is the 32.3-acre plot in the southwest quadrant of the Cotai Strip nearest to the Lotus Bridge Gate to and from mainland China. The MSC project has been the main loser so far from the global credit squeeze. The project is currently stalled and mired in litigation, including some between two of the consortium partners—New Cotai LLC and Hong Kong-listed eSun.

Macao Studio City was originally scheduled to open in mid-2009 at a cost of US$2 billion, and was billed as Asia’s first leisure resort property combining theatre, television and film production facilities and retail, with gaming, entertainment and worldclass hotels. MSC was to have featured 1,902 hotel rooms and suites, a 2,300-seat theatre, a 4,000-seat multi-purpose arena, a 40,000 square feet Playboy Mansion and a 500,000 sq. ft casino operating under the licence of Melco Crown Entertainment Ltd (which itself operates on a sub licence bought from Steve Wynn for US$900 million). MSC should also have had a 1.4 million sq. ft Studio Retail™ complex, created in partnership with Taubman Centers, Inc.

Because of the apparent deadlock between the partners, there have been rumours that the Macau government will take back the land assigned for MSC. That could in turn open up a new round of bidding for the prime site from existing operators, including SJM. Interestingly, SJM likes to refer to its property Casino Oceanus on Macau peninsula as ‘Macau’s first casino’. That’s because it’s the one nearest to the Macau Maritime Ferry Terminal. Were it to make a bid for the Macao Studio City site, it could then claim to have ‘Cotai’s first casino’, because of the site’s proximity to the Lotus Bridge Gate.

Were the MSC site to become available, it would be unlikely to attract operators new to Macau. The government said that Macao Studio City was the last deal where a sublicence of a sub-licence would be allowed (i.e., a gaming licence granted by an operator that is itself already working via a subconcession from a main concessionaire).

Back in the pot?

A person with knowledge of the financing of Macao Studio City has told IAG, however, that the rumours the government will take back the land may be overplayed.

The source said: “It is correct that a letter was recently sent to the partners by the government explaining that the return of the land was an option, but my understanding is that there were 30 other letters sent at the same time to companies in similar positions.

“The whole exercise may have been more geared towards residential properties rather than gaming, Cotai and MSC in particular. A big issue at the moment in Macau is the provision of social housing. Some developers have land for residential projects on the understanding they would include social housing. In some cases the government is saying: ‘Where is the social housing?’

“I’m not saying that the government is not looking at the issue of the lack of movement on MSC, or that the government won’t take back the land. But I certainly don’t think it’s going to happen imminently as suggested in some media reports,” added the source.

New Cotai LLC certainly has access to money. Its financial partners are Oaktree Capital Management and Silver Point Capital, both big hedge funds in the United States. Oaktree is one of the biggest hedge funds in the US, controlling US$76 billion in assets. Oaktree also appears to have credibility with the central government in Beijing and was recently invited to work with the China Investment Corporation, a wholly owned state company with RMB1.55 trillion in working capital.

But if MSC were out of the equation, who would be the most logical suitors for that prime site? SJM already has a gaming licence it could use to develop the property. LVS has its hands full with Cotai Five and Six. Wynn might be another possibility. MGM already has a site reserved behind Cotai Five and Six and currently has its hands full tidying and strengthening its balance sheet following the major spending on CityCenter in Las Vegas. MPEL doesn’t want the land taken away from MSC because technically that’s an MPEL project. It’s part of MPEL’s future story to sell to the company’s investors.

Looking ahead

With around 800 tables due to come onto the Cotai market before the end of next year and more than 4,000 new hotel rooms, it seems the only way is up for ‘The Strip’. The issue may be not so much whether the Cotai Strip can reach critical mass in terms of numbers of properties, but whether Macau’s centre of gaming gravity as a whole can be shifted any time soon. Currently, that centre of gravity involves a statistically tiny number of baccarat-loving VIPs providing most of the revenue on low margins for the operators because of the necessity to team up with junkets.

Only the sheer volume of roll makes it a profitable business for the operators, and a healthy 40% tax rate makes it a profitable business for the government. Time and the growth of a genuine, deep, middle class stratum in Chinese society with a real appetite for other pleasures aside from gambling is ultimately what will make the difference for Cotai. Bunnies alone won’t get the joint jumping.