Inside Asian Gaming

INSIDE ASIAN GAMING | October 2009 8 Cover Story would be the reason why they [Galaxy] wouldn’t raise equity capital down here [Hong Kong]. “I can understand the sentiment if you will from the Galaxy guys on that one. If the market wanted to pay up for Galaxy, it wouldn’t need an equity offering to do it. You can buy the shares in the open market. But right now it just seems that investors aren’t giving credit for Galaxy’s Cotai project, in that there’s capital in the ground without cash flow being generated. So the stock is more expensive on 2009 numbers than it really should be. Assuming they open the Cotai project and based on conservative assumptions about market share on Cotai, then Galaxy’s trading at about a third of the price at which it listed in Hong Kong. That tells us the market doesn’t believe they are going to open the project any time soon, or that they won’t execute. Execution [on Cotai] is the path to increasing the share value of Galaxy. “FromGalaxy’sperspective, the timingon the opening of Cotai has to bemanaged very very carefully in order to capture recovery in the market. I think they’ve been real smart about it. But the market’s not willing to give credit to that [Cotai] development for Galaxy, while they are willing to give credit to Wynn for Encore Macau.” Did you get a chance to tour Encore Macau? BL : “No. But I believe the room product for Encore will be somewhat similar to Encore Las Vegas. That involves more of the residential feel than traditional Wynn [hotel] product. We got a little bit of a peek at what the public space looks like from a distance.” Was there any discussion by Wynn about a project on Cotai? BL : “No. I want to stress we didn’t meet senior [Wynn] management on this trip. Prior to the IPO they weren’t allowing investment analysts to spend time on the ground here with senior management. But I think it will be a very very long time before Wynn puts a shovel in the ground on Cotai.” Why is that? BL : “I think that’s because of the desire to generate returns that are acceptable for that company. Encore Las Vegas has been relatively problematic forWynn Resorts.They haven’t generated a return on that project yet, unfortunately, because they opened into a recession. So it will take some time, and now there’s lots of supply coming online in Vegas [such as CityCenter] to compete with it. So that project [Encore Las Vegas] for the time being has been a disappointment for Wynn and for investors. “But Steve Wynn is a developer and operator who is in it for the long haul. It’s just that the timing [on Encore Las Vegas] wasn’t ideal. When it comes to transposing that on Macau, we’re starting to see a recovery here, we think. I think it is sustainable. I think it has a lot to do with the flow of credit and the cycle of money here at the high end [VIP player market]. “It’s certainly something to do with visa restrictions easing. But if you subscribe to the notion that Beijing will only allow a metered level of growth [in the Macau gaming market]—maybe [Mainland China] GDP plus—that may translate into 10% [annual gross gaming] revenue growth. And with some extra [casino] supply coming online, it will take quite some time to absorb the capacity that’s in the market. That means it will be some time before it makes sense to commit massive amounts of additional capital to this market. “So I think Wynn will enjoy his Encore [Macau] expansion for some time.” Is this ‘GDP-plus’ growth rate view on Macau a Union Gaming view or a consensus view in investment circles? BL : “That’s a Union Gaming view rather than a Wall Street consensus. People look at September’s preliminary numbers [on Macau GGR] and think: ‘Oh my gosh, this is a market that’s going to explode again to the upside with 50% plus revenue growth’. “I just don’t think that’s what Beijing has in mind. “Maybe we’ll see a month or two [growth] here and there that’s outside of the comfortable band for central government, but I think if I were a concessionaire in this market I would certainly not want to see 50% growth for a few months in a row.” What sorts of investors were on your trip? BL : “Purely institutional—mutual funds, long/short hedge funds—a thoughtful group but a cross-section for sure.” What was the feedback from the investors? BL : “There was a very very positive response from investors. These included people who hadn’t been here for some time. Some of themhave been to themarket many times—some even 30 years ago. These are some experienced investors, some of whom have a lot of history here in Macau. They’re aware of the structural challenges that have existed here. “All the meetings—whether it was with junket operators, the concessionaires themselves or other folks associated with the market—were very positive. I think the investors feel—if this group is a proxy for other investors—good about the recovery story here and the sustainability of growth. Outside of our small sample, that’s what the market—such as Wynn, etc—also told us.” Las Vegas Sands Corp’s IPO is due in November