In anticipation to the auspicious date of 11-1-2011, Baccarat Great Learning presents to you Lesson 29 :: Wǔgèyītiān Hǎohǎozhàotóu Jīnshǔtùnián. The literal translation is 5-Ones Day, Super Good Signs in the Year of the Metal Rabbit. Be sure to check out this special Lesson, in collaboration with Big Eye Guy ! Be a player, not gambler.

It looks like 2010 is going to end with a bang, with gross gaming revenues breaking the all-time record for a month and possibly set to smash the MOP20 bn mark. We will find out in a few days, but we thought it best to sound a slightly triumphant note as we ring out 2010 and prepare for another prosperous year ahead in Macau.

It’s been quite a year, for sure, but we think there is still plenty of running ahead of us. There is never a dull moment in this amazing town, and 2011 promises more of the same: the same drama, the same unpredictability in politics (corporate and family), and the same restless change. Here’s what we see as potentially the top issues to watch out for.

1) Gross gaming revenues will soar GGR will hit MOP27bn a month. Just watch it. Inflation is not a problem for Macau, which is being held up as a poster boy of brotherly love for Taiwan. It’s not about the number of gamblers, either. It’s about all the liquidity sloshing around the region, which is making it’s way into the junkets and the pockets of rich, well-connected individuals in and around Greater China. They are facilitating the outflow of money from the mainland which needs to be cleaned and recycled, and Macau is playing a vital role in this – and taking its 2.97% cut in the process.

2) Visitor arrivals will slow Macau is hitting saturation point in it’s immediate hinterland. Look at the November arrival numbers: up just 6.5% YOY. Which means expectations for the mass market are probably getting ahead of themselves. The high-speed railway arriving in Zhuhai is almost two years away, so don’t expect miracles from that in the coming year. The extension of the Guangzhou MRT system, which terminates in downtown Zhuhai (not near Gongbei), will likely impact the inter-city buses, but not passengers bound for Macau, for whom convenience is everything. It is supposed to open mid-year, but has also run into delays, so no one should be holding their breath. Long-distance marketing will remain a pipe dream while the Big Six continue to fight each other so childishly at the border points instead of putting their heads together and figuring out a way to do what the MGTO is not mandated to do.

3) Stanley Ho will settle his inheritance The era is passing with the man. We wish him the best of health, but it has become clear that the man who put Macau on the map as something other than a smugglers’ den is preparing to move on to that great casino in the sky. Wife No. 2 inherits the keys to the realm, but finds several doors bolted from the inside by Wife No. 4, who is now the Managing Director of SJM. That is the way it must be, we suspect, if peace and harmony are to reign throughout the land once the king is gone. As mentioned before, SJM has become the de facto Macau issuer of Treasury Bonds. It is too important a company, if that’s what one might call it, to become anyone’s fiefdom. A balance of powers is in everyone’s interest.

4) Pansy will get her IPO The rising tide is lifting all boats, including MGM Macau’s. The place has efficiency issues, but these can be easily papered over when the market is growing so strongly. We still wouldn’t give it as high an Ebitda multiple as MPEL, let alone Sands or Wynn, but we do think the IPO is a no-brainer. There’s plenty to go around in Macau now and in the foreseeable future.

5) Lawrence will get his way Yes, the rejection by Melco shareholders of his proposed compensation scheme this week for himself and his henchmen was embarrassing. Like Joe Stalin once famously observed, “The problem with elections is you never know who’s going to win them.” But we actually think this makes Lawrence Ho look a lot better than his rapacious sister, who sucked more than a billion HKD out of her concession recently without anyone noticing. He is playing fair by his shareholders, as any good corporate governance-minded CEO should be. And his concessionaire is already vastly outperforming his sister’s, too. We think it’s only a matter of time before the market realises he has actually done quite a good job with Melco-Crown under the circumstances in the last three quarters and decides to rerate his stock. He was just a bit premature with this compensation plan, which was more about his key staff than himself, anyway. Once the shareholders have started feeling some love in the stock price, we think the plan will be revived and passed.

6) Steve Jacobs will get his revenge The counter-claims filed on December 22 by Las Vegas Sands against the former Sands China president, Steve Jacobs, for his abrupt termination in August last year, are trite. We think there is a case in motion here of the Emperor being surrounded by people who won’t tell him he has no clothes. This lawsuit has already cost LVS far more than it was worth. Adelson has so much more to lose here than Jacobs does. Like the Cliff Cheong case that went to the eve of trial, Adelson will probably take this one to the brink. But we can’t see any way for this to turn out well for the company. Whether he gets paid in court or out of it, we see Jacobs getting even for his ignominious dismissal and pocketing a bunch of change. The real question is what the political ramifications will be. How much more public embarrassment can the Macau and Beijing governments take?

7) Galaxy Macau will disrupt the market There is much speculation gripping the chattering class in Macau at the moment about problems on the Galaxy Macau site, with suggestions swirling that the property is months behind schedule. Pay these rumors no heed. It won’t be a perfect opening – they never are – but it will get open before mid-year and it will be a significant disruptive force. With visitor arrivals flatlining, Galaxy will need to compete aggressively for mass players, and we have every confidence that it will. It won’t happen immediately. The Venetian and City of Dreams have big headstarts with their loyalty card programs and established brands. But Galaxy Macau has great hardware. We think it will take share from everyone and end up with at least 10-12% of the market. The only question is how much Starworld will be left with.

8) Re-ratings across the board will happen. Here’s the biggest punt of all, which we will leave to last. It is possible, very possible, that Sands will get approval to start selling the Four Seasons apartments. We’re not sure when, but if it happens this year, it would signal a watershed moment for Macau’s concessionaires. Everyone else would jump on the bandwagon, and the value of the land parcels in Cotai would go through the roof. Non-gaming projects such as Angela’s theme park would become more attractive, Galaxy would become a more serious real-estate play, and valuations would have to be adjusted upwards.

In the meantime, may we take this opportunity to wish all our subscribers a prosperous 2011. And please stay tuned.

Used with permission and copyright IntelMacau

Here it comes. We suspected that Lot 7+8 was not the only one in the government’s sights, and Lau Si Lo, the secretary for public works, confirmed it yesterday in the legislative assembly: five other plots of land are going to have their concessions declared lapsed.

There are two important things to note here. First, WHO THE HELL ARE THESE FIVE? Any hints, Mr Secretary? No? Not like, “Five plots that have lain dormant for years and are supposed to have casinos on them”? Not like, “Five plots out of the 30 we are analyzing that are the worst offenders because of x, y, and z?” Nothing?

Okay, so we understand there is a legal process under way here and discretion is important. Which brings us to the second most important thing: it’s not the supposed owners of land with pre-development administrative approvals who are likely to lose their land next, according to Lau. It’s the owners of parcels with actual land concessions.

Now, there is no way we are going to speculate about who these five might be. All we can say is that we wonder how many of the Cotai parcels sitting idle currently have formal land concessions. We see much land there with logo-emblazoned boards around them, but do they have the land concessions? If not, they might actually be safe.

But should anyone bet on it? We can’t say for sure, but we would have to wonder what would happen if those owners were now to submit formal applications for land concessions, as Sands China did. Or perhaps they have, and we just don’t know about it. We certainly don’t know what the government is thinking about them.

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We have been skeptics of the ability of City of Dreams to pull itself up to the same weight category as Wynn and the Venetian, as anyone who has read this newsletter will know. We have noted the volatility of revenues, we have criticized the design of the building, and we have questioned the strength and experience of the management team aside from its VIP marketing kingpin. But we’re starting to see reasons to cut Lawrence Ho a break and say that we are more impressed than we thought we would be by now.

To be sure, we still think Melco-Crown faces the tougher battle of the two existing landlords in Cotai as Galaxy Macau prepares to open next year. But on the evidence of what we see, MPEL is looking increasingly undervalued relative to its peers, to the point of being ridiculously so.

We do regular walks of the floors, and we have to admit that City of Dreams, for want of a better yardstick, has more of a buzz to it these days than it did just a few months ago. We are not yet ready to admit that it’s because of the opening of the US$250m THODW show (could a worse acronym have been dreamed up?) as we still can’t see how the addition of 10,000 people a week into the property can really move the revenue needle that much, especially as a large proportion are existing players being comped, and the biggest percentage are Hongkongers, a market that will soon become saturated with five years left on the contract.

However, we do get the sense that an important reason why COD is getting buzzier, and therefore will be better able to grow its mass revenues (everyone prefers to dine in a full restaurant, after all), is that it’s almost fully open. There are fewer dead spaces in the house, and evidence of life is more visible.

Moreover, we think COD is becoming, quite simply, a nicer and more enjoyable place to visit. Service levels have improved. We particularly like the fact that there are more pretty girls standing around, available to help people figure out where they are and where they should be (yes sir, there is a casino here). Table management seems to have gotten better, which may be explained by the arrival of a certain smart chappie who has asked us not to use his name here because he says we don’t know anything about anything and he doesn’t want to be tainted by association.

VIP continues to power ahead under Kelvin Tan, but where we see the biggest potential developing is under the other marketing guy at COD, who also doesn’t want to be mentioned here, in the mass segment. We understand that premium-mass is doing pretty well, even though no one in management will actually tell us so, and we agree wholeheartedly with friends of friends who work there that it is the segment of the market with the biggest potential to grow out of China. So if THODW can eventually fill its 2,000 seats with those kind of players every night, that will be quite an achievement.

Mostly, we have to say that the boss deserves credit, no pun intended. This is Lawrence Ho’s baby, and thanks to a combination of perseverance and courage he has taken Melco-Crown from Ebitda of around $75m in 2Q to around US$115m in 3Q to around US$??m (ask the licensed securities analysts) in 4Q on normalized win-hold. He has had a steep learning curve to climb, but he seems to be getting better, much better, with each quarter that passes.

But finally, we have to ask ourselves, given the rising tide of money flowing in from China, how could anyone in this market be trading at a 50% discount to the front-runners, especially when they are catching up so quickly in the Ebitda rankings? Stay tuned to see how the odds improve.

Used with permission & copyright IntelMacau

One of the best pieces of news to emerge in ages for Macau appeared in today’s Macau Daily Times. Hengqin island, which is now being managed directly by the State Council, will get its first megaresort in 2013. Sitting directly opposite Cotai, connected by the Lotus Bridge, the Chimelong International Ocean Resort will have its first phase open within two years after starting construction, at a cost of RMB10bn.

The “Ocean Kingdom” will have eight themed zones and include a night zoo, water world, the world’s highest ferris wheel, the world’s longest wooden roller-coaster and an “advanced theater” (shudder, Cirque du Soleil).

The group behind this has very solid credentials. Anyone who has not yet visited its existing park in Panyu, just south of Guangzhou, really ought to. It is world-class, right up there with Singapore’s night zoo and way, way ahead of HK Disneyland.

The park is expected to draw 20 million visitors annually once it is fully open. Which means the high-speed railway connecting Beijing and Wuhan to Zhuhai, and the feeder line going out to the rich east coast around Shanghai, will be more important by then. The Zhuhai airport, which is close to the site in Hengqin, will undoubtedly benefit, too. And, needless, to say, if all these visitors want to pop across for a flutter on Cotai, what’s going to stop them? By 2013, No. 4 will have her Equestrian theme park, with an indoor wave pool, open to do cross-marketing in Chimelong, no doubt. Stay tuned for more non-gaming news.

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From a professor to a PhD: Dr. Ambrose So, chief executive of SJM, says he has no problem with the Finance Secretary’s comments last week about the 5,500 table cap and the 3-5% additional limit after 2013. Brushing off whether this would have a dramatic effect on development of the Cotai projects, the Macau Daily Times quoted So as saying that as the table utilization rate had halved in Macau since the beginning of liberalization, the cap should have the effect of raising those utilization rates rather than slowing development. Speaking to Radio Macau, So said he believed the six concessionaires should be able to “better allocate the gaming tables”.

One of the things we like most about Ambrose So is his apparent grasp of irony, which is rare among Chinese managers. It’s kind of easy for the concessionaire who has nearly half of the 4,800 tables currently in operation to tells his peers to make do with what they have. Yet his logic is flawless. Divide visitors by number of tables and anyone can see how utilization rates have plummeted over the past five years. Given the central government’s stern warnings of late over the gaming industry’s development, especially the Premier’s plea to see more balanced development, the message is clear: more resorts does not mean more gaming tables. Any operator, or Wall Street investor, who has built their financial models based on past performance of casino operations and has assumed that additional table capacity equals incremental revenue, had best go back to the drawing board. Stay tuned.

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Francis Tam is not what one would call a formidable figure in person. But Macau’s finance chief, whose portfolio includes the gaming industry, carries a big stick. If anyone needed reminding about what that stick is, he could not have made it clearer than he did yesterday to reporters on the sidelines of a public event. Ahem, now hear this: the cap on gaming tables is here to stay, and will only be removed or altered at his discretion.

The table cap is what the government says it is: 5,500 and not a table more until 2013, Tam reiterated. Moreover, it’s only going to rise by another 3-5% annually after that – unless, of course, he decides otherwise. And if anyone thinks that they can get around him by securing land, building big resorts, and then crying about the lack of tables, well, they had best think again, because even though he doesn’t directly oversee land allocations, a similar policy will be followed by his colleagues in the cabinet. “The land granting process is not made under the concessionaires’ needs,” he said, adding, “We will make an overall plan.”

Now, this is not to say that Tam is an unreasonable man. “For sure, there could be an adjustment [in 2013] according to the needs of Macau,” he was quoted as saying in the Macau Daily Times (http://www.macaudailytimes.com.mo/macau/19142-Gaming-table-cap-remain-unchanged.html). “However, this is our policy,” he added. And if any doubt still lingered in reporters’ minds about what this might mean for Cotai, he said: “In the future, it will take some time to approve the concessionaires’ projects.”

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Wen Jiabao is hard not to like. Practising Tai Chi with the old ladies up at the Mount Fortress is something Chui Sai-on would never be caught dead doing, but the Premier pulled it off effortlessly yesterday. We’re not saying he did it to make a point, but if anyone cares about such things, a point was indeed made.

It was reinforced throughout his trip to Macau this weekend for the opening of the 3rd Macau Forum, as Wen made it clear that the Macau government still had a lot of work to do in improving the livelihood of its people. Stressing that there was a wealth gap in Macau, and consistently noting that the “local people” had to bear the brunt of inflation in housing and living costs, it certainly seemed like the local leadership was being graded and was not doing too well. Soon after visiting a local hospital, for instance, the Premier noted that the government “should not overlook” the importance of education and public healthcare – with the Macau Chief Executive, a PhD graduate in public health, standing by his side.

Speaking to reporters just before his departure at the Lotus Bridge on Cotai, which gave him a close-up view of the progress – or lack thereof – being made in diversifying Macau’s economy on Lot 5&6 and Macao Studio City, Wen pointed out that China had decided to position Macau as a world leisure and tourism hub, adding that in order to achieve economic diversification “a lot of effort” will be needed. And if the message of following the central government’s wishes had not been delivered clearly enough, he went on to say that, “The Guangdong-Macau cooperation framework will further promote the ties between Macau and the Mainland. The Mainland will impose a significant impact on Macau’s development and therefore I hope the [SAR] Government can be well-prepared and outline a [thorough] planning accordingly” (as quoted by the Macau Daily Times).

Perhaps Chui knows now what it must feel to work for someone like Sheldon Adelson, for whom good is never enough. Unfortunately for those who have felt the latter’s wrath, however, he can’t reach a mortal term limit. Wen is on a farewell tour of sorts, so perhaps his admonishments should not be taken too literally. But it’s not exactly what we would call a ringing endorsement from on high.

Used with permission & copyright IntelMacau

Not the labor quotas. What we mean is Sands China finally GETS IT. The company’s parent, LVS, told the SEC in a filing this week that, “Until adequate labor quotas are received, the timing of the completion of phases I and II [of Lot 5&6] is currently not determinable with certainty.”

Eureka! In one fell swoop, the company has done two good things. It has finally started to publicly acknowledge that it is in Macau at the behest of, and the patience of, the Macau and China governments. So, if it is to ever complete the long-delayed project, it will do so in a time and manner at the government’s discretion. The second thing it has done is to finally come clean with investors and creditors about the seriousness of the issue. The old “don’t worry, things are fine” line has finally been discarded and replaced with a bit of brutal honesty.

To be sure, the honesty has been brutal. The company now says it will probably not be able to ramp up construction until the Galaxy Macau resort is open – so it can get all those local laborers. That pushes the opening timeline for Lot 5&6 well into 2012, in our view. And the company says that the entire project, all three phases of it, might not be open by the May 2014 deadline set in the land concession.

But it is better this way, and investors and creditors would be foolish not to see that. The Venetian and Plaza are more than capable of meeting demand on Cotai in the meantime. Another few thousand hotel rooms would be nice, but the gaming floor, where 90% of revenues come from, can handle the forecast growth in the next two to three years. And who is to say the 2,200 rooms opening next door will not serve almost as useful a purpose in bringing more overnighters to Cotai? By the time Lot 5&6 is ready to open, demand will be more pent-up and the revenues will pop more quickly than if it were to open earlier. We are much more comfortable with Ebitda forecasts of US$800m a year for that property in 2013 than in 2011.

More importantly, the chances of Venetian getting a quota for the 10,000 to 20,000 imported staff they will need to run that resort will be higher if they stop pushing so hard, and so publicly, for the construction quotas now. And uncertainty surrounding the table cap might have disappeared by then, too.

Used with permission & copyright IntelMacau

It takes a brave person indeed to admit defeat. The slightly less-bullish crowd beat us in October, as gross gaming revenue came in at MOP18.9bn. It was a delightful new record, but it was MOP1.1bn (US$140m) less than our call. We so desperately wanted the MOP20bn barrier to be breached, we did. Alas, ’twas not to be.

We have our reasons for thinking why now was not the time. One of them may have been Singapore, which is taking an increasing share of outbound travel from China and can only have cut into Macau’s gaming stream by now – US$140m is not a lot of money in the bigger picture of the Asian gaming pie. Perhaps Gary Pinge is going to be proved right, after all. But whatever: we should have seen the Singapore competitive threat coming, too.

Still, it was a very nice number. And we would ask readers to cast their minds back to January this year, which was when we made the call – and most other analysts were still expecting YoY growth in the back half of the year to be flat. Well, blow us down, but this October was up 50% over last October – which itself was up 50% on January 2009.

The question is, then, how big can 4Q be? And what about next year? Sorry, but this time we’re not giving away our forecasts. All we can say at this stage is that we are unrepentant and remain above the average. Unless something big comes along, that is. Now, what could that possibly be?

Used with permission & copyright IntelMacau