Inside Asian Gaming

INSIDE ASIAN GAMING | December 2008 4 Editorial Editor and Publisher Kareem Jalal Director João Costeira Varela Business Development Manager Matt Phillips Operations Manager José Abecasis Contributors Michael Grimes, Desmond Lam Steve Karoul, I. Nelson Rose Richard Marcus, Shenée Tuck Andrew MacDonald James J. Hodl William R. Eadington Graphic Designer Brenda Chao Photography Ike Inside Asian Gaming is published by Must Read Publications Ltd Suite 1907, AIA Tower, 215A-301 Av. Comercial de Macau - Macau Tel: (853) 6646 0795 For subscription enquiries, please email subs@asgam.com For advertising enquiries, please email ads@asgam.com or call: (853) 6646 0795 www.asgam.com Printed by Unique Network Printing Factory Ltd. Tel: (853) 2828 2832 Fax: (853) 2828 2830 E-mail: unique@macau.ctm.net Chilling Out Following a 3% year-on-year decline in October and a 1% drop in September, Macau’s gross casino revenues grew 3% in November to US$940 million.That growth is far below the November 2007 year-on-year increase of 49%, but comes against a tough comparable and beat the expectations of most analysts. The November performance also throws into doubt recent predictions that Macau’s casino revenue could fall by up to 20% next year. If anything, it only confirms that nobody really knows what will happen. Certainly no commentator in Macau predicted that gross gaming revenues would rise by 50% in the first seven months of 2008 despite the intensifying global credit crunch. Bringing revenue growth to a halt in September was no mean feat. Macquarie Capital analyst Gary Pinge commented: “The fact that China had to implement five separate visa restrictions in order to slow Macau’s gaming revenue growth should highlight to investors the level of pent-up demand for gaming services from mainland China.”Mr Pinge is among a majority of analysts who believe the Chinese government will ease the visa restrictions early next year. Nevertheless, the assumption that the revenue drop in September and October was primarily the result of the visa restrictions could be mistaken. In our last weekly Asian Gaming Intelligence e-newsletter (to which readers can subscribe for free at www.asgam.com) , we highlighted a theory posited by Gabriel Chan from Credit Suisse, suggesting a major factor behind the drop in Macau’s VIP gaming revenue was the difficulty faced by junket operators in raising credit on behalf of the players. In that reading, the casino VIP trade is just another victim of the global credit squeeze. A few years ago Mr Chan’s analysis would certainly have made general market sense. Up to the ending of Dr Stanley Ho’s casino monopoly in 2002, VIP room operators and their sub agents in Macau relied chiefly on a combination of rolling chip commission and private cash (some of it of reportedly exotic provenance) to maintain their liquidity and underwrite their ability to issue credit to high rollers. Since 2007, they’ve increasingly been looking to the Hong Kong stock market to provide equity funding for the sector. Hong Kong-listed Dore Holdings, and also Amax Entertainment Holdings, are pioneers of the new-style business model,offering liquidity to VIP room operators and their sub representatives by consolidating agents under their respective brands, thus creating volume and economies of scale. Provided investors in market-listed junket consolidators keep faith and the stock doesn’t crash off the graph completely, then those operators should not have to rely on the debt market and should thus be insulated from the credit crunch. Investment decline Macau has enjoyed spectacular rates of economic growth over the past five years, with st rong growth continuing into the first half of this year—real GDP grew 31.6% year-on-year in the first quarter of 2008 and 21.1% in the second. The spectacular overall growth rate masks a significant decline in investment, however. Investment as measured by gross fixed capital formation fell 20.7% in the second quarter, as the global credit crunch forced casino developers to either curtail or even cancel some projects. The investment decline is set to seriously worsen in the second half. In November, the city’s biggest investor, Las Vegas Sands Corp (LVS), placed a moratorium on the majority of its planned US$12 billion investment in developing casino resorts in Macau. This and delays announced by the city’s other major casino operators are discussed in detail in this issue’s cover story. Macau’s economic growth spurts since 2004 have coincided with the unveiling of new tourism attractions and casino resorts, and there will now be a longer wait for further new attractions. Still, it could be a welcome break, as Macau has been straining under the load of the visitor influx and the city now has some much-needed breathing space to address infrastructure bottlenecks and alleviate other social problems—from traffic congestion to housing becoming increasingly unaffordable for locals—created by the casino boom ahead of the next wave of mega resort unveilings. Furthermore, it appears the Macau market needs more time to develop an appetite for the extensive non-gaming offerings planned by the mega resorts.The once dominant“supply-creates- demand” thesis has proved not to extend beyond the casino floor, with the unprecedented range of entertainment,retail and dining offered by Venetian Macao having thus far met with a lukewarm response since the property opened in August last year. Macau remains primarily a day-trip destination reliant on gambling, and though the addition of new mega resorts could arguably contribute to creating sufficient critical mass to finally draw a new breed of visitor to Macau, it may be that Macau really needs more time to reach out to new markets and develop the necessary supporting infrastructure. Gaming is considered a relatively recession-proof industry, even though the severity of the current credit crunch by itself has led to diminished takings at the world’s other casino capitals, including the Las Vegas Strip. If even gaming has succumbed, the provision of new retail, entertainment and dining capacity under present conditions seems ill-advised. By arriving a little late to the Cotai party, the coming attractions will enjoy much better attendances. Kareem Jalal and Michael Grimes