Inside Asian Gaming

INSIDE ASIAN GAMING | October 2009 Wynn 22 A standout feature of a globalised economy is that investor exposure to the equities of a single company in North America or Europe canmean exposure to physical or invisible assets on the other side of the world. The breaking of the historical territorial link between where a company was founded and where it currently conducts its business is a relatively recent phenomenon. It has major potential benefits for equity investors as it allows them to diversify into other markets without necessarily going to the trouble of researching the secondary market in great depth. A blue chip or otherwise solid global company can act as the de facto gatekeeper to the alternative market thanks to its own due diligence procedures and positive management record. So what’s the significance of this for Asian casino gaming markets and investors? Arguably, it’s this: gaming investors from North America may know more about the fundamentals of Las Vegas than they do about Macau, but they trust people like Steve Wynn to spend their money wisely in Asia. Track record Mr Wynn and his management already have a good track record for tight cost control, quality execution and good returns in the Macau market. On the costs front he scored massively by getting Lawrence Ho and James Packer to pay US$900 million of the initial US$1.2 billion cost of Wynn Macau viaagamingsub-concessionpurchased from Mr Wynn for Melco Crown Entertainment. In terms of grabbing Macau revenue share and maximising investor returns, Mr Wynn understood from the outset that in a VIP-focused market such as Macau, Wynn Macau needed partnerships with external junket agents and could not rely only on direct players or the mass market for success. Then via careful selection of his retail partner brands at Wynn Macau (such as Prada and Louis Vuitton), he managed to create one of Asia’s highest grossing malls per square foot. He avoided getting into the as yet unproven meetings and conventions market in Macau. It doesn’t end there. At a modest capital outlay of US$650 million, he is creating a significant amount of extra VIP capacity (400 suites described as having more of a residential than hotel feel) on the Macau peninsula. So when Wynn Resorts Ltd announced plans to float a local unit on the Hong Kong stock exchange, what investor wouldn’t want a piece of that action—especially in a rising local equities market? Even grannies on the Las Vegas Strip know that Asian people are passionate gamblers. And even those outside professional investor circles know that only 18 months ago gross gaming revenues in Macau were building at 50% year on year. They still managed to average 30.9% year on year growth in 2008, despite a global recession and a credit squeeze on local VIP gamblers. So far, so good. But when the prospectus for the company’s initial public offering in Hong Kong makes it explicit that the bulk of the US$1.6 billion raised will be going not into direct investment in the hot hot Macau market, but instead into a Cayman Islands company controlled by the Wynn parent company to be used for (at the time of going to press) unspecified purposes, then the local IPO starts to look like as if it could be a great bit of financial engineering on behalf of the core product in Las Vegas. US debt Wynn says it doesn’t need any of the cash to complete the US$650 million Encore Macau, the VIP-focused complement to Wynn Macau due to open next door in the second quarter of 2010. In addition, a well respected gaming analyst has told Inside Asian Gaming he thinks it will be a“very, very long time” before Wynn considers building a resort on Cotai. A number of other analysts have speculated that the ‘unspecified purposes’ for the funds from the Hong Kong Wynn’s Hong Kong IPO seems less about investment opportunity in Macau and more about bailing out the home operation