Union Gaming Research Macau released the following note on Sunday, 21st October:
On Friday evening, SJM announced that it had received its Land Concession Contract from the government for its Cotai parcel. This event confirms the sixth development project of the next wave of Cotai supply. We believe SJM has already taken the first step towards the contract being published in the Official Gazette, namely having made the initial contract premium payment of MOP800mm. We think the gazetting process could take another five to six months, suggesting a mid-2013 construction start date assuming other approvals are obtained in a timely manner.
Likely a 2H16 opening
In addition to the gazetting process, SJM will also need various other approvals, such as construction, design, and labor. With this in mind, we suspect that construction will likely begin in 2H13, and assuming a 36 month development timeframe would imply a 2H16 opening. As previously communicated, the project will contain up to 700 gaming tables, 1,000 slots machines, and 2,000 hotel rooms. We believe the project’s budget will be in the USD2.5bn range. The project will also contain various and as-of-yet undisclosed non-gaming amenities.
Land premium of MOP2.1bn (USD269mm) +67% relative to MGM’s premium
We believe there could be some confusion with respect to what seems like two widely different contract premium amounts for SJM and MGM China (Buy rated) despite the parcel sizes being nearly identical. We believe there are likely two primary drivers behind this disparity: 1) the gross floor area (GFA) of the projects, and 2) the relative quantity of amenities. We note that SJM’s contract premium is 67% higher than MGM China’s. However, on an expected GFA basis, we calculate that SJM’s premium is only 18% higher (see Figure 1 in PDF). Given that the SJM project is also anticipated to have 25% more hotel rooms than MGM’s project (2,000 vs. 1,600) and up to 40% more gaming tables (700 vs. 500), items like these might account for the balance of the premium disparity.
All six concessionaires now have visibility on Cotai
With the SJM approval in hand, all six concessionaires now have visibility on the timing of their respective Cotai projects. Both Galaxy Entertainment (Buy rated) and Melco Crown (Buy rated) have already commenced heavy construction and are generally on track for a mid-2015 opening. Should Sands China (Buy rated) and Wynn Macau (Hold rated) receive (heavy) construction approval in the near-term, their respective projects could open sometime in 1H16. Finally, based on what we think will be a spring 2013 gazzeting for both SJM Holdings and MGM China, we think their projects could open in 2H16.
What remains unclear is how or if the government might try to stagger the pace of development for any or all of these projects in order to prevent a supply / demand imbalance. There are various tools that could be employed, including the timing of other necessary approvals (noted above), the doling out of labor quotas, and even the allocation of table games (e.g. properties given a small allocation of table games, which would grow to the full complement of tables over a multi-year period, effectively easing in the new supply – but muting returns out of the gate). At this point, we believe a wait-and-see approach is the most likely scenario with no notable restrictions implemented – particularly if 2013 GGR trends are robust and the single-asset operators remain capacity constrained.
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