Macau’s operators steel themselves for steady though perhaps unspectacular performance in 2009’s Year of the Ox
Macau’s market performance in 2008 was a hare and tortoise race. Gaming revenue raced ahead for the first eight months of the year, only to be caught at the end by the creeping tortoise-like effects of visa restrictions and global recession.
In 2009, it looks as though the Year of the Ox will live up to its name, with operators and players determinedly plodding through recession in the expectation of better days ahead.
In the first eight months of 2008, Macau’s gaming income was growing at an unprecedented rate of 50% year-on-year. At that time, the suspension of any casino project was unthinkable. Asian equity and debt markets seemed to have escaped the worst ravages of the US-focused sub prime lending crisis, and financial institutions and investors based in the Asia Pacific region appeared to have enough liquidity to back Macau operators in the roll out of their building programmes.
LVS—bloodied but unbowed
That all changed in the final quarter of 2008, when the big wave of the world financial tsunami finally hit the shoreline of China. First there was the dramatic announcement in November to the US Securities and Exchange Commission made by PricewaterhouseCoopers, auditors for Las Vegas Sands Corp, that the very survival of LVS was in question. It followed the company’s unsuccessful attempts to interest the debt markets in issuing fresh funding in order to meet covenants on existing loans and to provide fresh capital for its construction projects in the US and Asia.
LVS chairman Sheldon Adelson, his wife and family injected a staggering US$1 billion of their own cash into the business in the space of a month from the beginning of the financial world’s own ‘Black September’. Then, in November, the company announced it had succeeded in raising a further US$2.1 billion from the sale of extra shares and warrants without the need for pre-approval by existing shareholders.
Despite these remedial measures, LVS suspended building work on its new projects on Cotai, resulting in around 11,000 sub-contracted building workers being laid off. In December, the company announced it was shedding 500 casino workers in Macau—all foreigners and including a number of people at executive level.
LVS said many of the managers removed from the Macau payroll would be offered the chance of reassignment to the company’s Singapore resort, the Marina Bay Sands, though that project is also a victim of the financial crisis, experiencing its own bout of ‘phased opening’ syndrome. LVS says it expects to open at least 1,000 hotel rooms and a portion of the casino by the end of 2009, but other key elements such as the convention centre and the shopping mall are unlikely to be fully open to visitors until the first quarter of 2010.
Melco Crown Entertainment—steady as she goes
Until LVS’s historic announcement that it was mothballing its new Cotai sites, the company’s chairman, Sheldon Adelson, had always been proud to highlight what he said was LVS’s excellent record for executing projects on time.
On the face of it, Melco Crown Entertainment (MPEL), the joint venture between Lawrence Ho and James Packer, is sticking to its own timetable for opening its City of Dreams integrated resort on Cotai in the second half of 2009, despite the credit crunch and toughening trading conditions. In practice, the City of Dreams project has already seen some deadline creep, some of it related to funding issues. At the time of the ground breaking ceremony in spring 2006, the JV said it planned to open the resort in “the second half of 2008”. Cost overruns and delays on MPEL’s Crown Macau project were a significant factor in pushing back the City of Dreams timetable. Since then, MPEL has been working to improve its balance sheet and its execution on its Macau projects.
In November, Crown Ltd, Mr Packer’s Australian casino unit, which has a 37% stake in MPEL, announced it had negotiated a A$1.6 billion syndicated loan from ten banks. Depending on how one looks at it, this can be seen either as a consolidating measure or a rolling over of existing loans. In any case, it allowed Crown to make an early pay back on debt that had been due in August 2010. Crown’s next major refinancing is now reported to be due in late 2011.
In December, a few weeks after the syndicated loan was announced, Crown revealed it had raised a further A$300 million, this time in equity. The company has other spending commitments aside from Macau, namely in Las Vegas and Canada. Nonetheless, these measures, taken together, are a sign of the determination of Mr Packer and his team to maintain the confidence of analysts and investors at a testing time for the whole world economy.
Macao Studio City—2011 and counting?
Maintaining investor confidence in ongoing projects is one thing. Getting sufficient backing to move beyond the foundation phase of a project is another. Spare a thought then for Cyber One Agents Ltd, the joint venture behind the US$2.4 billion Macao Studio City, the entertainment-focused casino resort planned for the northern end of Cotai, near the Lotus Bridge immigration point. At the time IAG went to press, there appeared to be very little activity on the Macao Studio City site.
It’s no secret that the global credit crisis has had a negative impact on funding for Macao Studio City and pushed back the projected opening date of phase one of the project to 2011.
Richard Hamilton, Vice President, Development for Taubman Asia, which has a 25% stake in the retail portion of Macao Studio City, told IAG recently: “When I started on this project we were talking about 2009. Now we’re talking about 2011.
“In some regards it’s frustrating, but in many other ways it’s an opportunity,” he added, suggesting that by the time the project is up, the economy and visa situation for Chinese visitors will probably have improved.
SJM—the lotus hoping to blossom in 2009
Before the markets went on holiday for the Christmas break, Dr Stanley Ho went on record as saying the balance sheet of his casino operating company SJM Holdings is solid, despite the global economic turmoil.
“We are all aware of the impact that the current economic situation is having on Macau and the gaming industry, but SJM’s strong financial position and our prudent steady growth strategy have left us well placed to weather this storm,” Dr Ho said in comments reported in the Hong Kong press.
“Our development plans are moving ahead as scheduled and we will come through these times stronger than ever,” he added.
SJM received considerable criticism over the summer last year for launching a public share offering that many market commentators regarded as ‘too little too late’. It raised only around half the US$1 billion that analysts had thought the company was worth even six months earlier. In the light of subsequent world events, however, SJM’s limited exposure to new commitments regarding shareholder dividends, its low levels of debt and the fact it is one of only two casino operators in Macau currently turning a profit for shareholders (the other being Wynn Resorts) means SJM now looks like a prudently managed company with strategic planning of the highest order.
RelatedPosts
SJM recently opened a new 430-room hotel tower attached to its HK$7 billion Grand Lisboa site—across the road from the original Lisboa Hotel and casino on the Macau peninsula.
SJM will also operate a franchise casino at the L’Arc Macau, a property on the Macau peninsula opening in the first half of 2009. The casino, hotel and residential project is being jointly developed by Dr Ho’s wife, Angela Leung, and International Entertainment, a company listed on Hong Kong’s alternative share index known as the Growth Enterprise Market (GEM). International Entertainment is controlled by the family of New World Development chairman Cheng Yu.
SJM is also developing Oceanus, a HK$1.1 billion SJM owned-and-operated casino on the site of the former New Yaohan department store opposite the Macau Maritime Terminal on the peninsula. Oceanus will be opened in stages, with 300 mass-market gaming tables available by the end of 2009.
In a recent report on SJM’s prospects for 2009 and beyond, Deutsche Bank analyst Karen Tang was generally upbeat.
“By 2010, SJM should have opened five new projects. We forecast that these properties will generate HK$2.2bn EBITDA by 2010, based on 17% market share with 14% EBITDA margin,” she says.
“Grand Lisboa has proven that, under new management, EBITDA margin at new properties can be substantially higher than at legacy casinos (1H08: 18% vs. 2%),” she adds.
| Profit & Loss Forecast | ||||||
| Year to December (HK$m) | 2005 | 2006 | 2007 | 2008E | 2009E | 2010E |
| Macau gaming revenues | 45,564 | 56,260 | 83,022 | 109,400 | 93,710 | 87,971 |
| yoy % | 13% | 23% | 48% | 32% | -14% | -6% |
| SJM Market Share | 75% | 61% | 39% | 27% | 20% | 23% |
| Revenues | ||||||
| Legacy casino: Self-promoted | 22,335 | 19,411 | 14,571 | 10,180 | 3,564 | 2,317 |
| Legacy casino: Third-party | 11,071 | 14,786 | 12,787 | 8,971 | 4,096 | 2,663 |
| New casinos | – | – | 4,788 | 9,924 | 11,781 | 15,314 |
| Non-gaming revenues | – | – | – | 43 | 409 | 409 |
| Total revenues | 33,406 | 34,196 | 32,147 | 29,075 | 19,442 | 20,293 |
| yoy % | -2% | 2% | -6% | -10% | -33% | 4% |
| Gaming tax | (12,882) | (13,227) | (12,498) | (11,339) | (7,582) | (7,914) |
| Other income | 147 | 137 | 141 | 50 | 20 | 20 |
| Sub-concession income | 1,560 | 177 | – | – | – | – |
| Marketing expenses | (13,497) | (14,569) | (12,433) | (10,582) | (7,204) | (7,048) |
| Operating expenses | (3,316) | (4,074) | (5,871) | (5,598) | (3,363) | (3,687) |
| Pre-opening expenses | – | – | – | (220) | (50) | (50) |
| EBIT | 5,418 | 2,641 | 1,486 | 1,385 | 1,263 | 1,614 |
| yoy % | 37% | -51% | -44% | -7% | -9% | 28% |
| EBIT margin | 16.2% | 7.7% | 4.6% | 4.8% | 6.5% | 8.0% |
| Finance costs | – | – | – | (0) | (132) | (150) |
| Associate & JVs | (10) | (32) | 3 | 7 | 6 | 6 |
| Tax | (35) | (13) | (220) | 0 | (63) | (56) |
| effective tax rate | 0% | 8% | 0% | 5% | 5% | 5% |
| Minorities | – | – | 40 | 27 | (46) | (53) |
| Net profit | 5,374 | 2,424 | 1,534 | 1,224 | 1,017 | 1,344 |
| yoy % | 37% | -55% | -37% | -20% | -17% | 32% |
| DB net profit, ex-one offs | 3,814 | 2,247 | 1,534 | 1,224 | 1,017 | 1,344 |
| yoy % | -3% | -41% | -32% | -20% | -17% | 32% |
| Dividend payout | 134% | 92% | 0% | 286% | 50% | 50% |
| Dividends | 7,176 | 2,233 | – | 3,500 | 509 | 672 |
| source: Deutsche Bank, SJM | ||||||
Deutsche Bank says that even though in 2009 SJM’s share of total Macau casino revenue may fall below 25% for the first time ever, it expects the launch of new products will help SJM claw back share to around 23% in 2010.
Ambrose So, SJM’s chief executive, is confident the company can square the circle of expanding operations while at the same time controlling day-to-day costs. One way to achieve this is to transfer existing staff to new sites as they are opened, rather than recruiting new people.
Mr So said the recent troubles experienced by competitors in Macau were because some had “over-leveraged, over-borrowed and over-projected the market”.
Mr So and his boss certainly have long experience of operating in the roller coaster world of the south China economy, with its potential for rapid boom and equally rapid bust. It’s possible this may have given them an edge over some of their foreign rivals when it came to anticipating the downside of the Macau gaming market.
Ms Tang of Deutsche Bank says: “SJM has a long-serving senior management team that has substantial experience in the management of casinos, and local connections in Macau. Strong understanding of local culture and customer preferences will be advantageous when formulating business strategies in a fast-changing competitive landscape.”
She adds the company has also brought in new executive blood in the last few years from Macau and beyond, and this may also help maintain its position in a highly competitive market.
“Since 2006, SJM has expanded its strategic and operational management team through an additional 150 experienced personnel,” says Ms Tang.
“Many of them have held senior positions in other casinos in Macau or overseas. For example, Frank McFadden, President of JV and Business Development, was formerly COO for Venetian Macau Ltd. Similarly, John Catt, Tim Gilbert, and Lindsay Stewart, who are now overlooking public relations, table games, and slot machines, have all previously worked for Sands or Venetian Macau Ltd. We believe that the new blood will bring industry best practices to SJM, and help improve operating efficiencies.”
The truth about SJM’s good positioning following 2008’s market turmoil may in fact be more prosaic than Mr So and Ms Tang suggest. At least some of SJM’s modest exposure to global financial markets is probably due to what American commentators call ‘dumb luck’. The company was originally very keen to raise money via an initial public offering. The fact it only managed to raise around half of the cash the markets had been hoping for actually led some analysts to mark down the company’s stock during the summer. If SJM is to capitalise in 2009 on its own good fortune and the hard luck of some of its rivals in 2008, it will certainly need shrewd leadership.
