Inside Asian Gaming

INSIDE ASIAN GAMING | March 2009 8 Cover Story wallet ticketing system for Hong Kong public transport—in his own wallet. Galaxy says the majority of its StarWorld customers come from Hong Kong and Mainland China. Keeping in touch with every segment of the market appears to be a keynote of Mr Lui’s and Galaxy’s approach. “The five-star hotel market is a great market, but there’s also a great market in appealing to another tier of customer,” says Mr Lui. “With our integrated resort structure on Cotai, we will be able to cater for first tier customers at our Banyan Tree and Okura Hotels, but we also have 1,500 rooms catering for a second tier market. We feel there’s a gap that we can fill successfully.” A Chinese perspective It appears this is not merely mood music to suit recessionary times. Like Dr Stanley Ho’s casino operating company SJM, Hong Kong-listed Galaxy was founded and is run by Hong Kong Chinese entrepreneurs who appear instinctively to understand the roller coaster boom-bust tendencies of the local economy. Those tendencies apply regardless of any global credit crunch. This understanding of the local fundamentals tends to create a management style that believes in incremental steps and moderate gearing on debt, and chooses not to be seduced or flattered by the peaks and troughs of the market. “Four or five years ago, when I started the business here, people asked me: ‘What do you use to measure your performance?’” says Mr Lui. “At that time, a lot of people assumed marketshare,orrevenue,orEBITDA[earnings before interest, taxation, depreciation and amortisation] or EBITDA margin. But I always said no, it should be based on ROI—return on investment,” he asserts. “We’re definitely in the gaming business, but we’re not gamblers,” adds Mr Drake. “I remember the days before the credit crisis when people were pushing money toward us saying ‘Take the money,’” continued Mr Lui. “‘Use the money and try and maximise your building programme,’ they said to us. We said ‘No thank you’. We need to feel the demand is there before we start building,”he explains. Controlled aggression Personal modesty and caution in business should not, however, be mistaken for reticence or passivity when it comes to leading Galaxy Entertainment Group through the challenging times of a global recession or being willing to take tough decisions for the sake of the future success of the company. “We always try and expand within our means. That doesn’t mean we are not aggressive. We are very aggressive,” states Mr Lui. “But it means that realistically we don’t go beyond our means. We have a very strong balance sheet with over HK$5 billion in cash, which we strengthened recently with our bond buyback program. So we’re in a safe, comfortable position right now. Do we have any pressure right now? The answer’s no. We’re very fortunate to be well capitalised.” Mr Lui is upbeat on the point recently raised by Deutsche Bank—that Galaxy’s decision to buy back bond debt could leave it short of cash for Cotai, especially given current credit market conditions. “Deutsche Bank was saying we need to raise financing to do this and that, but the answer to that is of course we do, now that we have bought back some of the debt,” explains Mr Lui. Cash is king “Of course, a replacement loan would have to be in place for us to finish off what we have started after we had the opportunity to provide liquidity for some bond holders. We’re also reducing our overall debt by redeeming our debt at a 50% discount. In the meantime, we also save approximately 8 to 9% per year in interest. It was a great deal for any investors who wanted the cash back.” “We retired US$170 million in debt at a cost, in round numbers, of US$86 million, and we saved approximately US$40 million in total interest,” adds Mr Drake. “It’s a win for us obviously from our capitalisation standpoint. We have de- leveraged the company, so our risk profile has changed, and at the same time the people who tendered, tendered for a reason, so it must have been a win for them also.” “Do we need fresh capital to complete Cotai?” asks Mr Lui. “Yes, especially nowwe have gone about buying back bonds. But we felt that with a stronger balance sheet, with the cash flow coming in, and an extra year and half cash flow coming in from StarWorld, plus lower construction costs, it would put us in a very comfortable position,” he asserts. Half price “StarWorld is also generating positive cash flow nicely and can contribute to the funding of the overall project,” adds Mr Drake. “With the state of the construction industry, we can see already that our construction costs will be less, so when you also factor StarWorld’s healthy cash flow for a longer period of time along with construction cost savings into our overall cash flow, it actually turns out to be a better proposition for us,” concludes Mr Drake. The idea of shareholder value and of allowing investors access to liquidity is a recurring theme for Mr Lui and Mr Drake. Those ideas are as reasonable and unobjectionable as the concepts of motherhood and good apple pie. So is it anything more than rhetoric? “Ultimately, you’ll be judged on whether you make money for your shareholders,”says Mr Lui. “My primary focus is ROI, not how much EBITDA you generate. I don’t want to risk too much. You are not dealing with a small business here. You are handling billions of StarWorld Hotel & Casino