Grand Waldo has re-announced its plans to build a retail outlet mall, nearly two years after first announcing the Hong Kong-listed Get Nice’s acquisition of the complex. Ponte 16 says its extension into Ponte 14 will finally go ahead, nearly three years after it first outlined plans for shopping facilities there, and it wants to build a Japanese-style department store. Hey hey, what do you know, Macau really is a shopping paradise after all.

None of which is necessarily good news for the Venetian, which poured billions into its Grand Canal Shoppes and Shoppes at Four Seasons when everyone thought Sheldon Adelson was crazy to do so. He has been proved right, and the traffic running through those malls and the sales being rung up by Louis Vuitton testify to that. But being proved right in Macau doesn’t usually inspire congratulations. It usually inspires imitation and cut-throat competition.

To be sure, the Shoppes at Four Seasons, Wynn Macau and One Central have nothing to fear from Grand Waldo or Ponte 16. But it will be interesting to see how the Grand Canal Shoppes handles the competition. We have been advising the resort’s management for years to use the Venice-themed shops as the centerpiece of their China brand-marketing efforts. Will they do something before it’s too late and they are surrounded by mass-market competitors? Stay tuned to find out. Copyright & used with permission of IntelMacau.com

In 2020, we are pretty sure that we will be going to another annual results press conference for Galaxy Entertainment Group where a banner will be posted behind the sprightly 92-year-old chairman, Lui Che-woo, announcing the 44th consecutive quarter of Ebitda growth. And we will very likely be saying to ourselves then, as now, “How could anyone not increase their Ebitda QoQ in a market growing as strongly as this one.”

But that would be churlish. Yes, all boats are being lifted now by the rising tide of money coming out of China, and Galaxy always goes out of its way to acknowledge this, focusing attention of media and investors on the bigger picture of overall market growth. And as the company’s results made clear yesterday, that’s exactly what happened in 2010: revenue was up 58% compared to 58% growth of overall GGR in Macau. Sure, management decided to take a charge on their bond buyback and revalued their convertible notes, which meant net profit of HK$898m missed consensus estimates of HK$1.2bn, but hey, this is not SJM, they need to manage their cash more carefully. And their Ebitda growth QoQ in 4Q was slowest in the market, but hey, this is not Sands China or Wynn Macau they need to consider their junket relationships and they don’t have a very big mass floor at StarWorld. To be sure, management knows where the company’s fundamental strength lies, and always will in the mere fact that they have a gaming license in the world’s hottest gaming market.

However, we also happen to think the management of GEG are underplaying their own individual potential to outperform the market once again, with the opening of the Galaxy Macau megaresort in six weeks’ time. We think the company has never looked in a better position to significantly increase its market share than it does on May 15. So when the chairman says he thinks the resort will help his company post a 20% increase in revenues, we would have to say, “Well, that’s good old-fashioned Chinese modesty for you.”

We have said it before, but it needs repeating: the starting point of success in Macau is great hardware. We drove up the hill between Cotai and Taipa a few nights back and looked over our shoulders at the Galaxy Macau as it went through some lighting tests on the building. It was, for lack of a better description, awesome. We have no doubt this property is going to get the foot traffic through its mass gaming floor that it needs, even if its marketing team is somewhat new to the game.

What makes us more confident than the chairman’s public forecast, however, is what we think the property is going to do to the VIP side of the business. We can see significant disruption coming as Galaxy opens the swankiest new VIP rooms in town and reaches out aggressively to its junket partners, who in turn are going to be very aggressive among the VIP customers who may currently be going through other junkets to other properties.

Not only do we think Galaxy Macau will be a disruptive force in terms of revenue share, we also think it will have a strong longer-term advantage over its neighbors-to-come in Cotai by having been the last to soak up what available local talent there is left in the labor market. Contrary to Sheldon Adelson’s silly claim yesterday that Galaxy was obliged by the government to hire two locals for every blue card because it had been too aggressive in hiring foreigners a potentially litigious claim that apparently has no foundation in fact, by the way – we think Galaxy has done better with local talent recruitment than we had previously given it credit for. The spotlight on Cotai’s future development rests currently on how Sands, Wynn, MGM and SJM will get the necessary construction workers to build their projects. What it should be focusing on is where they will get the staff to open them. Anyone who may have thought Galaxy was having a tough time ought to think how hard it will be for the next project to come along.

In conclusion, we have to throw out probably our biggest reason for being bullish on Galaxy again. Put simply, it’s encapsulated in the new resort’s slogan: “World Class, Asian Heart.” This company knows how to do business in this part of the world, by thinking longer-term and always working amicably and positively with its partners be they at the shareholder level, in government, among the community, or within its own talent pool. (When its senior staff leave the company, they are driven off in a Rolls Royce rather than packed off by security guards.) And as its chief executive made clear in response to a reporter’s question yesterday, there is zero chance of Galaxy being investigated by a US federal or state agency. That is going to increasingly count for something going forward in this market. Stay tuned. Copyright & use with permission of IntelMacau.com

It is not an honor to have been named by hotels.com has having the highest average room rates in the region; rather, it is a sign of weakness.

As mentioned yesterday in this newsletter, we believe the mass visitor market is becoming saturated and Macau’s resorts need to do a better job of marketing the destination to an audience outside of Guangdong. But they are hampered in this endeavor by three things: 1) The MGTO’s insistence on marketing Macau as nothing more than a destination for heritage trails and MICE events; 2) The difficulty of getting to Macau, given its miserable air services and embryonic rail links; and perhaps most important, the shortage of available and affordable hotel rooms.

An average room in Macau, according to the hotels.com survey published by Macau Daily Times, cost HK$1,492, up almost 20% on the previous year. That beats neighboring Hong Kong by around a third.

Moreover, the situation appears unlikely to be addressed anytime soon. Galaxy will be bringing another 2,500 rooms onto the market this year, but they are all aimed at a high-end audience and we are pretty sure their hospitality supremo, Heinz Roelz, will not accept anything less than a premium on the market average for those.

Sands China is talking about opening only 1,000 rooms in Lot 5&6 next year and, now that Shangri-La has pulled out, we don’t know if those will still include smaller rooms aimed at business travelers who like the Traders Hotel brand. We think it could still take years, not months, for Sands to finish the rest of the 6,000 rooms slated for the rest of Lot 5&6.

Meanwhile, COD is still trying to figure out which brand to put on its next hotel tower, and we don’t see Lot 3, Macao Studio City, Wynn, SJM 1&2, or MGM coming online until well beyond 2016, which would take their owners uncomfortably close to the concession expiry deadline anyway.

Help may be on the way across the border in Hengqin, where the State Council-directed zone will surely put up hotels designed and priced for the Chinese market faster than Cotai can. But it’s still not ideal, given the lack of 24-hour access to Macau across the Lotus Bridge.

So, what are we left with? A great short-term situation for the incumbents, where room rates and gaming table win-per-day numbers keep climbing, but a worrying longer-term trend as Macau prices itself out of the itineraries for the booming numbers of mainlanders traveling abroad in the next few years. Stay tuned to see how it pans out. Copyright and use with permission of IntelMacau.com

The latest government statistics show visitor arrivals for the first two months of the year grew just 3.3% over last year. We are not yet ready to ask all those analysts who predicted this would be the year of the mass market to set a pace similar to the VIP market what they have done with their models; partly because the much-heralded Guangzhou-Zhuhai railway line has not yet been connected to Gongbei, and is supposed to be by the middle of the year (upon which many of their models rest), and partly because year-on-year growth in mass gaming floor revenues rose in those two months at a much faster YoY clip than arrivals (nearly 28%). But we are going to start asking the question of where growth in the mass market is likely to come from on a scale commensurate to keep justifying the buildout of new properties on Cotai.

Indeed, we are six weeks away from the opening of a new megaresort in Cotai, one that will have the most splendiferous mass floor Macau has ever seen. Management would be foolish not to be targeting at least HK$400m a month in revenues from that floor, and we know this is not a foolish casino management team, led by the evergreen Dennis Andreaci, who opened the Sands and Venetian. Now, put aside those YoY mass gaming numbers mentioned previously, and look at the growth of mass gaming revenues MoM over the past four months since last October’s record: November -8.55%; December +8.08%; January +5.47%; February -0.14%. This is not what one would call a market going from strength to strength.

Granted, Galaxy Macau will be opening in one of the seasonally strongest months of the year. In 2010, May’s mass revenues were up more than 10% over April’s. But Galaxy Macau is opening mid-month, after the crucial Golden Week is finished, and heading into one of the weakest months of the year, June, which last year saw mass revenues drop 10% over May.

Our point, dear readers, is that unless Galaxy Macau wants to commandeer China’s national railway and aviation networks to bring in another 100,000 or so mainland Chinese from beyond Guangdong for their starting day, they are most likely going to be opening into a saturated mass market.

Have no doubt, however, that Galaxy Macau’s mass floors will be packed on opening day, and probably for a few weeks and possibly months thereafter. Which begs the obvious question: whose mass floors are not going to be quite as packed as they were before?

Apologies, we digress. The more important question raised at the beginning of this ramble needs to be addressed. And indeed, we are not pessimists. We see an infrastructure buildout coming in the Pearl River Delta and its hinterland that will significantly improve accessibility to Macau over the next five years. That should at least increase repeat visitation. And we do see rising wages and expenditure by average Chinese consumers as reason to believe mass gaming revenues will continue to outpace growth in visitor arrivals in the longer term. Given the slowdown in building on Cotai, plus the table cap, we don’t see cause for concern about those mass floors beyond 2016.

However, 2016 is not now. We also see no reason to put on the rose-tinted glasses so beloved of foreign investors and declare that gaming in Macau should be considered on par with sales of home appliances across China. Gaming across China, perhaps. But not gaming in Macau. Infrastructure improvements notwithstanding, Macau is still too difficult a place to get to for most mainland Chinese who can always find a good card game in their neighborhood. It’s a big country, and Macau is not Las Vegas, with 100,000 hotel rooms and direct flights to every major city in the country.

Moreover, Macau’s casinos have shown themselves woefully incapable so far of extending their marketing campaigns beyond Guangdong in a meaningful way. And it’s not just because advertising of gaming is banned in China. Only the third-party casinos under the SJM umbrella appear to have the kind of ethnicity-charged and commission-based networks that can scour gaming dollars from as far away as Zhejiang (providing more visitors than Japan or Korea in February). This goes a long way to explaining why SJM’s mass revenue growth outpaced Sands China’s last year. Once Cotai has been fully built out, and there are more attractions designed to keep visitors from further afield here for longer stays, that may change. Maybe. Copyright and use with permission of IntelMacau

Robert Kuok, the Malaysian Chinese tycoon who owns what can politely be called a diversified business empire spanning sugar, timber, palm oil, property, media and hotels throughout the region, and who some analysts believe to be Asia’s richest man, has ended his one-time association with a gaming company by withdrawing from Sands China’s long-stalled project on Lot 5+6.

Sands announced today in a regulatory filing that Shangri-la Hotels, which also manages the Traders brand, would no longer be involved in the development of the hotel tower on Lot 5 accounting for around 1,200 rooms. It gave no details of which other hotel group might be taking Shangri-La’s place.

To be honest, we are surprised it has taken so long for these companies to part ways. Not only is Shangri-La known to be a stickler for detail and protocol on its projects, meaning an inexplicable delay in handover dates on the hotel would be hard to explain to the boss, but it is probably the best-connected hotel group in China and must have been watching events unfold in the Jacobs case and US investigations of Sands with a mixture of contempt and anxiety.

Perhaps this will work out all for the best. We still cannot understand why Sands would want another hotel brand on its properties. Shangri-La is a great brand in China, to be sure – the company occupies probably the best few blocks of real estate in Beijing and has dozens more luxury hotels around the country – but Macau is a unique destination. It’s like Las Vegas in this respect: who would want to brag to friends that they stayed at the Hilton in Vegas when you can say you stayed somewhere like the Venetian? So if you have the Venetian already – and market research suggests it already has quite a following in China – why not just create sub-brands for your properties in Macau?

Anyway, who are we to question the strategic genius of the man who runs Sands China? What we would leave readers with, however, is this consideration: what does the termination of this agreement – even if it was mutually agreed – say about the political fortunes of Sands in China? Stay tuned. Copyright and use with permission of IntelMacau

Someone once said that it is every woman’s inalienable right to change her mind about what to wear. We think we ought to borrow from such timeless wisdom and change our minds about the Macau gaming sector now that we have seen the latest results from SJM.

It’s not a eureka moment. This has been building steadily over the past year, nagging at us like a spouse in a seven-year marriage. Until now, we had been firm believers in the mantra that Ebitda is Everything. As long as a company has positive cashflow with which to reinvest in a booming market like Macau, it should, to quote Barack Obama, own the future. But now we are starting to better understand the wisdom of common Chinese corporate philosophy that cash, rather than cashflow, is king over the longer term. And it’s not so much what you do as who you do it with that counts in the world of Chinese business, which is what the Macau gaming sector is an extension of.

Indeed, over the past year, SJM has shown itself, in our newly formed mind, to be a significantly superior operator to Sands China, and at least on par with Wynn Macau. It’s not just because it has better guanxi across the border although this is indeed an important factor in its success. It is also because the company has, by luck or by wisdom regardless, positioned itself to become the biggest beneficiary of the market’s surge since visa restrictions were lifted and bank stimulus spending initiated in mid-2009.

The numbers say it all. Net profit nearly quadruples in 12 months to US$450m. Ebitda margins are widened as self-owned properties raise their contribution, leading in 4Q to a 21% QoQ jump in Ebitda. Grand Lisboa vastly outperforms the market, growing revenues 40% QoQ on an Ebitda margin of 26% the same as Sands Macao over 2010 and undergoes a big expansion of VIP and premium-mass tables. Dividend payout of 50%. Net cash balance of HK$10bn so no bank lending needed for the next Cotai project.

In sum, SJM has the cash with which to reward shareholders, and the cash with which to expand quickly in Cotai once it gets its land approved. And it has achieved this despite we reiterate despite having to give away an extraordinary amount of its revenues to its third-party partners and its dominant junket operator.

And yet, the stock continues to trade at a 40% discount to its peers. That’s right, 40%. Not 4%. Nearly half what its competitors trade at.

For this, we have to try to understand the perceived wisdom of analysts such as those clever chappies at CLSA, who say that SJM will always trade at such a discount because of the Ho family and its constant squabbling over ownership rights. Sorry, but this is one argument that needs shredding.

Look, people, SJM has always been embroiled in disputes over ownership. Right back to its founding, when Yip Hon, Teddy Yip and Henry Fok put up most of the cash and connections, and then bitched for two decades at Stanley Ho about the way he ran the business until Cheng Yu-tung came in and bought out Yip Hon in an acrimonious public-relations battle. Then Stanley’s sister entered the fray, arguing that he had bilked her of dividends and diluted her shares by “losing” the shareholders’ registry. The current struggle among No. 2, 3 and 4 wives and the family of the late No. 1 is just part of a long tradition. It has never affected the business model. Insiders take what they can, and  shareholders take what they can get: this is the way SJM (nee STDM) has always been run, and it seems to somehow have worked.

In fact, we would have to say that the company is now looking better than ever in terms of its management’s focus on improving returns for all shareholders, rather than just those shareholders who happen to own third-party casinos and junkets within the SJM umbrella. As we have previously noted, the net result of the recent family war is that neither side can act unilaterally. We are more confident than we have ever been that the Cotai projects will not be run as extensions of No. 4’s part of the business, but as genuine mass-market resorts with wide Ebitda margins that contribute the kind of revenues to the company’s bottom line that the Grand Lisboa currently does.

To be fair, it would be impossible to close any discussion of the performance and outlook for SJM without noting the obvious fact that its results of the past year would have been impossible without political support from across the border. In a year when VIP revenues surged overall by 70% while mass grew just 13%, SJM was clearly the biggest winner, with VIP revenues up 95% and rolling-chip volumes up 88%. Sands China, by contrast, saw its roll numbers rise just 18%. On the mass business, too, SJM jumped 10.5% to Sands’ 1.67%. That’s not a fair game, by anyone’s standards. We admire Sands management for wringing whatever costs they can out of their business and growing Ebitda margins the way they have, but in the revenue stakes, they have clearly been left behind by SJM in a surging, state-directed market.

But at the same time, we’re not here to cry about what’s fair or not. We like the advantage SJM has in the political wars just as much as the commercial wars. And we believe it is absurd that the company’s stock should still trade at such a massive discount to its peers. It is not facing any regulatory probes of its business, it has no problem dealing with junkets, it is sitting on a huge pile of cash, and half of every dollar it nets ends up in its shareholders’ pockets. Most importantly, if it can run the Grand Lisboa so successfully, imagine what it can do in Cotai. Stay tuned.

Used with permission & copyright IntelMacau

There’s not much point in commenting on the panic-selling yesterday due to concerns over radiation leaks in Japan. We cannot yet see how it will affect China or Macau. What we can see is how the latest turn in the Steve Jacobs case will affect Macau, so let’s focus on that.

Yesterday could not have been a good day for Sheldon Adelson, as his former Macau CEO appeared in court with lawyers and shred the Las Vegas Sands defense against his lawsuit for wrongful termination. The judge took little over an hour to hear enough arguments before deciding that Jacobs was correct, the case deserves to be tried in Las Vegas.

For those of you who are just tuning into this drama series, the situation is this: Jacobs filed his suit in Las Vegas, and LVS tried to get it thrown out on the grounds of jurisdiction, saying he was hired in Macau. Jacobs produced reams of evidence to show that Adelson runs the entire group, including LVS, Marina Bay Sands, and Sands China, from his Vegas headquarters.

This much was, to be frank, a no-brainer.

The more interesting question is what comes next. Yesterday’s proceedings were filmed, against LVS objections, and will be seen by anyone with an interest in this case, regardless of whether they live in New York or Beijing. Could the real-life imagery of the protagonists and antagonists sway decision-making by political players who might otherwise have looked at the wire reports and shrugged?

Perhaps more importantly, we have to wonder what the US federal and state regulators must be thinking right now about how to proceed with their own enquiries into some of the allegations raised by Jacobs. They obviously wouldn’t want to be rushed in their investigations by the knowledge that details of how LVS operates in Macau are about to be aired in public.

And what of the Jacobs legal team? What more do they have in their ammo bag? This hearing and the filings that led up to it were only about jurisdiction. It would be hard to believe they don’t have much, much more in reserve for when the real shooting starts in this case.

Indeed, there is plenty more to come. Stay tuned.

Used with permission & copyright IntelMacau

A few readers have castigated us since yesterday for failing to lump Melco-Crown in with Sands China, Wynn Macau and MGM China (coming soon) as casino operators who might come under tighter regulatory scrutiny from the US. We’re sorry. You are absolutely right: with its ARDs listed in New York, MPEL is every bit as exposed to investigations of Macau casinos by US regulators. It might not have assets worth protecting in the US, like the others have, and therefore can cross the Nevada Gaming Control Board off its Christmas-card list, but it does have to worry about the SEC, DOJ and any other federal agencies poking their nose into how casino operators here run their business.

That said, we have to offer forth some advice here in the spirit of patriotism to Lawrence Ho, CEO and co-owner of MPEL, given the current political circumstances in which Macau finds itself after both the NPC and the US State Department’s report calling Macau a major money-laundering center. Which camp would you rather be in, Lawrence? Using the fingers of one hand, we calculate you would need around US$3bn of cash to buy out your partner, James Packer, who adds very little value to the company anyway. Your ADRs are barely traded by serious institutions in the US. So where is the downside of nationalizing, er, privatizing this company? If you would like to have lunch now that the NPC is over, you know where to find us.

Used with permission & copyright IntelMacau

The event of the year in Macau is nearly upon us, as Galaxy Entertainment Group announced yesterday the opening date for its new Galaxy Macau integrated resort on Cotai: May 15.

Yes, you heard right, that is two weeks after the May 1 Golden Week period begins. Correct, Galaxy Macau will miss one of the three busiest times of the year for the mass market in Macau. But when you have spent nearly a decade planning this event, what is another few weeks, anyway?

At least, that is how we are sure the Lui family is viewing the opening of their resort, and they are probably right to do so. Lui Che-woo didn’t become a billionaire doing business in Hong Kong and China by thinking short-term. As the slogan “World Class, Asian Heart” makes clear, this is a Chinese company (although don’t tell the Japanese guests at Okura that). This property was a long time in the making. Even though we found the press release yesterday a bit too convoluted in trying to explain why this is the first true integrated “resort” in Macau, we cannot quibble with the claim that this is the first integrated resort in Macau that has been designed with an Asian audience primarily in mind. We think, as we have said before, that this will be half the battle won when the doors open on May 15, and if the company needs a bit longer to let the paint dry before that happens, then it’s a good decision.

See you there on opening day.

Used with permission & copyright IntelMacau

The battle for control of the empire built by Stanley Ho appears to be over. According to a statement released by the King of Gambling, reported by the South China Morning Post, all four branches of his family have agreed on how to split up his assets in STDM and SJM.

Details remain to be clarified, of course. We are not yet sure if this means that Angela Leong, Wife No. 4, will return her shares in SJM that Stanley transferred to her late last year, or whether control of Lanceford and Stanley’s personal stake in STDM, allegedly seized by Chan Un-chan, No. 3, and the children of Lucina Laam, No. 2, will also return to the patriarch pending settlement. In other words, we are not yet sure of who is in possession of what.

What appears to be a given is that neither of the two main parties in the dispute, No. 4 and No. 2, has a commanding advantage over the other. No. 4 was specifically quoted as saying that the agreement will not affect the composition of the SJM board of directors. This means that, although No. 2 supposedly controls the board of STDM, parent of SJM, exerting control over the listed company is not guaranteed. Clearly, someone from among the rest of the STDM shareholders has intervened or been instructed to ensure that the issue of replacing SJM directors will not be brought onto the table when shareholders gather next week for the annual general meeting. Given that the Fok Foundation, Cheng Yu-tung, Winnie Ho, and “others” control more than 50% of the voting shares in STDM, it is not difficult to see how influence could have been brought to bear on this issue by whomever was appointed by whomever to mediate.

But the settlement also suggests that No. 4 even though she is managing director of the gaming company and in close alliance with the current management team of CEO Ambrose So and COO Louis Ng cannot ignore every other wish of whomever is voting the proxy for STDM at the AGM. Last year, that was Daisy Ho.

So what we really have here is an agreement to achieve peace in our time, rather than a peace for all time. But we also have to wonder who it was that stepped in to mediate the dispute. And whether that influence will continue to be wielded behind the scenes, especially once the patriarch goes to that great casino in the sky. On current observations, we would assume so, especially when there is so much revenue flowing through SJM’s gaming license that belongs to people other than those who signed this ceasefire agreement. But stranger things have happened in this family saga before.

Used with permission & copyright IntelMacau