Inside Asian Gaming

inside asian gaming March 2015 24 Insights “Entertainment City is becoming a true IR district. What makes a good IR district? It’s the Cotai Strip, it’s the Las Vegas Strip, in its heyday it was Atlantic City. Having multiple integrated resorts in close proximity to each other is a good thing.” people come and experience Solaire, we almost always get them back. And they tell their friends. So we’re actually looking to capitalize on word of mouth. We have a lot of players who come here, sometimes the more intrepid ones, and literally within 30 minutes of being here they’re texting or WeChatting their friends: “Look, you’ve got to check this out, you’ve got to come down here. Let’s make another trip. You’re going to love it here.” Both major Manila players—Solaire and Resorts World Manila—are experiencing sizable increases in promotional costs and trade receivables, suggesting intensified competition and perhaps indicating a market approaching its limit. From Solaire’s perspective, is this analysis accurate? The proof is in the pudding. Based on net revenue, and these are published, publicly released figures, our EBITDA margin in the fourth quarter of 2013 was 18%. Our EBITDA margin in the third quarter of 2014 was 42%. So it’s more than doubled. That’s on a vastly higher revenue base, it’s not strictly through cost-cutting; it’s increasing revenue and margin flow-through. That’s the top-down way of looking at it. Let’s talk about it when it comes to mass and VIP. In VIP, we have had just tremendous increases in revenue. The growth of VIP turnover and revenue is producing much, much more profit, absolute pesos in profit. But on a margin basis, the VIP business is a lower-margin business. But, as we often say, profit margin doesn’t pay debt service and dividends, pesos do or dollars do. So while the VIP business has grown dramatically, [even though] it’s a lower-margin business, it has still been wildly good for our financial performance. The commission structure, the private jets, the staying in villas like this, that’s all part of promotional expense. Now let’s talk about mass, which is also a contributor on a smaller scale to the promotional expense percentage. We are also getting a much higher level of mass player. We are really starting to penetrate that premium-mass market. Mass also has its reinvestment program, a loyalty program. In the case of Solaire, it’s SRC, Solaire Rewards Club. The more the mass customer plays and the higher level they play at and the more money we make, we actually reinvest in them more, but we [also] reinvest in them proportionately more. So marginal profitability goes down, although absolute profits go way up. So, hopefully, that makes the point how we can be dramatically increasing revenue and absolute profits and overall EBITDA margin going way up—I mean 18% to 42%—while at the same time that one discrete line item for promotional expense as a percentage is also going up. That’s just how the math flows out. Is there still room for growth in this market? Most definitely. Is there room for the other resorts in Entertainment City? Does this promotional increase give you any pause about that? No, it does not. Again, it’s the total equation. City of Dreams has just opened. They’ve got a nice property, they’re good operators. Honestly, we welcome them. Why do we welcome them? Right now, even though Solaire is doing as well as it has, we are just out here by ourselves. Entertainment City was designed as a district. It was designed as a virtuous cluster of integrated resorts. That’s where we have to go. Entertainment City is becoming a true IR district. What makes a good IR district? It’s the Cotai Strip, it’s the Las Vegas Strip, in its heyday it was Atlantic City. Having multiple integrated resorts in close proximity to each other is a good thing. People want to try different things. Players take great comfort, whether they’re VIP or mass customers, in having multiple casinos to go play at. Sometimes they’re lucky and they win. Other times, they’re unlucky, the house wins. When they’re unlucky, one of things that they will sometimes do, they will just go to the other guy’s casino to play. And in doing that you get a nice rotation. We’re really missing that right now. The other thing that really happens [is] to have a lot more non-gaming amenities. We’re building more non-gaming amenities. We just opened it with Sky Tower. CoD [City of Dreams Manila] is going to bring non- gaming amenities. Those things, of course, help the non-gaming customer, but they also help the gaming customer. Also, there is a tremendous amount of entertainment and activity, both gaming as well as non-gaming, throughout not only Another bayfront strip— Atlantic City’s once-bustling boardwalk