As mentioned earlier this week, we need to start giving credit where it’s due (pardon the pun) to MGM Macau. Although we are still skeptical it can be sustained, we are impressed that the growth numbers are looking up while margins are widening. Ebitda of US$83m for the third quarter was basically just back in line with previous performance on a normalized win-hold (2Q was down on 1Q due to luck), but the October numbers indicate the property’s fourth-quarter result should be significantly better. And it doesn’t appear that they are giving away the shop, either. For now, at least. We don’t yet know what will happen when win-hold changes direction, and in which rooms it will change. That is the thing about having a mix of rolling-chip and revenue-share rooms for a major junket on the same property.

However, it’s not just in the VIP rooms that progress is being made. As MGM Resorts CEO Jim Murren said on the earnings call with analysts, he thinks smarter decisions are being made everywhere in the Macau property. We can see it on the mass gaming floor, too. Things are definitely looking up for the IPO, if it ever gets out the door. Given that no one really wants to buy the Vegas-laden stock listed in the US just to participate in the Macau play, the carving out of those assets with a HK listing ought to benefit both shareholders in the joint-venture. So much so, in fact, that they are cashing in already, sucking US$125m each out of it ahead of the listing. Nice work if you can get it.

We also note Grant Bowie’s assertion (yes, he’s still there) that the company will get its pre-allocated plot of land on Cotai soon. How MGM Macau will fund its Cotai development is still a mystery, given the debt load being carried on the peninsula and the apparent desperate need for cash of its shareholders. And we also have to empathize with Sands China executives, who cannot say anything publicly about anything in Cotai before the government has announced it, and yet Bowie and Steve Wynn can fire away happily to the media. Go figure.

Used with permission & copyright IntelMacau

Some might say we make our own luck in life. Others would stick to the saying, “The harder you work, the luckier you shall be.” We could believe that Steve Wynn, for one, has no truck with Lady Luck, even though it was in his joint that Frank Sinatra crooned the most famous Vegas hit of them all, “Luck be a lady tonight.”

And yet the original gaming tycoon, who built a fortune in the Nevada desert, lost much of it in a high-stakes game with Kirk Kerkorian, and then made a new one with little more than his wits, charm, a couple of billion and a devoted wife, would have to admit that the Lady can sometimes be a tramp.

In September, just as it looked like he was set for another record quarter of earnings in Macau after a strong summer, the Lady turned savagely against him in his VIP rooms. In the first two weeks, he got whacked so hard by some whales that his intra-month market share dipped below 10%. Unfortunately, the timing could not have been worse, coming just as his neighbor, MGM, had made it known to the junket industry that it was ready to play the game more aggressively, with generous revenue-share deals and front-money incentives. One piece of evidence pointed to another, and soon a few analysts were downgrading Ebitda forecasts. His property came back in the last week of the month, as the Lady perhaps realized she had been too harsh, and he ended up holding slightly above theoretical. But his competitors held better, and so his market share slumped from around 14% to 12%.

It was the kind of experience that must have drawn empathy from every one of his competitors, but especially from those who saw their rolling-chip volumes dip by a lot more from August to September. Altira was the worst, down 25% (but much may have flowed to its sister property), followed by Sands Macao at -19% and StarWorld at -16%. Even the mighty SJM was down slightly MoM and if it hadn’t been for a phenomenal performance in the premium-direct rooms at the Plaza, Sands China would have had egg on its face, too as the Venetian held poorly. Only MGM saw its roll up on a monthly basis.

To be sure, Lady Luck masked a deteriorating performance across the market in September, which is traditionally a weaker month, stuck as it is between the end of summer and the biggest month of the year. Win-hold percentages were great for everyone in September, well above theoretical in almost all cases. The market has come back staggeringly strong in October thanks to a record-breaking Golden Week but, again, we won’t know how much of that is volume-related or luck-related until we see the month-end figures.

Which brings us to this week’s apology. We have to confess that it has taken us far longer than it should have to give the brass at Melco-Crown a nod for the way they have always highlighted the luck factor in their earnings releases. We have to assume that they will not just do this in bad times, but will do it in good times, too. Like when they release their 3Q results.

To be sure, the MPEL team deserve some credit (no pun intended) for the hustle they have shown over the past quarter. It’s not enough that they have one of world’s three VIP marketing superstars in Kelvin Tan. He alone could not have accounted for the sharp rise in rolling-chip turnover at the two properties. There had to have been single-minded focus among the management team, ie, Lawrence Ho and Ted Chan, on how to punch above their weight in the VIP market. This hustle and focus was finally rewarded in September, with a record blended win-hold between Altira and City of Dreams.

Will this luck hold? That is the everlasting question, not just for MPEL but for everyone in this market. True, win-hold becomes less volatile as volumes increase. SJM will never likely see a 4% month. Yet neither will it likely see a 2% month. Galaxy tends to be less volatile, too, because it has so little premium-direct business. Indeed, as the proportion of premium-direct rises at properties such as COD and Plaza, so can we expect some more wobbly MoM performances – at least until those volumes are big enoughj in themselves to smooth out luck variations.

And so, as this US$24bn-a-year market goes to $30bn, and then to $40bn, and so on until the bubble pops (if it ever does), it would be wiser of all of us who are trying to gaze into QoQ and MoM crystal balls to have a little souvenir statue near at hand, preferably in the shape of a Marilyn Monroe figure. There is only so much hustling we – and the concessionaires – can do. The rest is up to her.

Used with permission & copyright IntelMacau

Considering the month Macau has had so far, with revenues conservatively tracking towards a monthly record, perhaps Lady Luck has decided that the city has had enough of her fortunes for now. Typhoon Megi seems certain to hit our shores, with the No. 3 signal going up this afternoon. The ferries will likely be shut tomorrow, just when all those Hongkongers start to skive off work, scrape their pennies together that their spouses don’t know about, and head over for a punt. Oh, woe is us; what are we to do?

We are great believers in the China story, as we expressed in our e-newsletter last week. We think the near-term outlook for Macau is bigger than most analysts are calling, and we believe that China is headed in the right direction from a macro-economic perspective. As infrastructure improves, as incomes grow, and as the marketing pitch into the hinterland gets better, we see Macau continuing to prosper. As we said last week, there are clouds on the horizon, we just can’t see them yet.

However, it is always worth considering what lies beyond the radar. So this week we would like to turn readers’ attention to three very timely reports in today’s South China Morning Post and ponder what they say about Macau’s future.

The first is the front-page lead about China’s most important political event of the year, the annual gathering of the Central Committee of the Chinese Communist Party: “4 Trillion yuan to boost key industries.” As the report points out, what makes this year’s meeting of 371 people in Beijing that much more important is two items on the agenda: the elevation of Vice-President Xi Jinping into the position of Vice-Chairman of the Central Military Commission, and discussion of the next Five Year Plan, which will be launched by outgoing Premier Wen Jiabao in March next year.

The two are obviously linked. If Xi, who currently oversees Hong Kong and Macau, is to become the man who will oversee implementation of the next Five Year Plan, he needs to be confirmed as Hu Jintao’s successor the same way that Hu was confirmed as Jiang Zemin’s successor a decade ago. Tradition suggested it was supposed to have happened last year, and when it didn’t, it set off waves of speculation that a struggle was under way between factions in the party. If Xi is not elevated at this weekend’s meeting, then it will be an indication of a much more serious political power struggle, and discussion of the Five Year Plan will be meaningless by comparison.

We seriously doubt this will happen. Which brings us to the second issue raised by the SCMP report: a fundamental change is being envisaged for the next Five Year Plan. The emphasis will shift away from growth targets and towards specific sectors and regions as Beijing attempts to restructure the country’s economy. The ultimate goal, it would appear, is to give teeth to the stated objectives of the central planners: that China needs to stimulate real, sustainable domestic demand. What we take this to mean is that the current model is no longer feasible. Pumping the economy with liquidity via the banks and building massive infrastructure projects while the export sector takes care of revenues has clearly begun reaching the end of its life span. It is time for more fundamental market reforms.

The challenge facing policymakers in trying to turn words into deeds, however, is highlighted by the second article in today’s edition of the newspaper: “Bankers fear sharp increase in bad loans.” On the front page of the business section is a story about a poll of bankers on the mainland who estimate that at least a quarter of all loans in the system are bad, half are not repayable by the entities that took them out but can be repaid by other means, and only a quarter are sound. More than two-thirds of respondents said they think the bad-debt problem will “explode” within three years.

We don’t think anything this dramatic this will happen, as nothing will be allowed to explode in China just yet. The party’s grip on power is still too firm to allow something like this to get out of control. A recapitalization will take place, like happened 10 years ago, when the big state banks began taking on foreign shareholders and eventually listed on overseas markets. But clearly, the financial system is not working like a financial system should in a real market-based economy. Too much money is going into projects that do not generate real value-added economic benefit. This money, which has benefitted Macau enormously via the VIP sector since last year’s stimulus plan was launched, will likely continue to pour in under the coming Five Year Plan, but the reforms envisaged in the plan are likely to be aimed at reducing the importance of state-directed credit by the time Xi starts his second five-year term.

The third article, also on the front page of the business section, highlights the future that Chinese policymakers want to see, which is young people splurging on credit cards: “Consumer credit boom on the cards.” The newspaper interviews 25-year-old Jessie Chen, who has a VW Beetle, a Blackberry, several Louis Vuitton bags and – get this – around a dozen credit cards. All on a monthly salary of around US$500. People like Jessie are still in the minority, as the bulk of consumer debt is still in houses and cars, but the trend has been set, as far as Beijing is concerned: it wants to move the credit bubble from the cadres to the masses.

OK, so time to cut to the chase. What do these three articles say about China’s – and Macau’s – futures? Here is what we see.

First, we see the credit bubble continuing to inflate in China as economic stimulus packages continue to be rolled out via the party the only way it knows how – via the party. In other words, the VIP sector will continue to perform in Macau for the foreseeable future, as state-run banks funnel credit to the well-connected. But it’s not going to last forever.

Second, we see the credit bubble continuing to inflate in China as the party struggles to reform the banking sector. It’s easier to reform the banks gradually, because to do otherwise would cause too great a shock to the system, and a new party chief is not going to allow that to happen on his watch. Not the first watch, at least. It is a ticking time bomb, but it’s not going to explode anytime soon. So both VIP and mass are safe, for now.

Third, we see the credit bubble continuing to inflate in China as the banks struggle to ignite a consumer spending boom by handing out more and more cash to people like Jessie Chen, who have never had to think about rising interest rates or prudent financial planning. This will be good for the mass market in Macau.

The question we know all our readers are asking at this stage is the obvious one: when will the music stop? And we are sorry to disappoint by saying that we have absolutely no idea. It may never stop. The bank recapitalizations might well continue indefinitely – or at least until reforms have taken root and a real financial system starts to function along the lines of … oops, we were about to say America’s or Europe’s.

Seriously, though, enough of the crystal ball-gazing. The risk is out there. We will watch for it washing up on our shores, but there is no point worrying about it now. Unless, that is, you are putting together a couple of Five Year Plans of your own. Stay tuned.

Used with permission & copyright IntelMacau

It was the strangest experience inside the Grand Lisboa on Saturday afternoon, when we went for lunch. For a second we thought someone in Beijing had reimposed visa restrictions, as there were hardly any punters on the casino’s main floor. But then we realized that it was the day after the end of the official Golden Week – even though, yes, it was a weekend. That’s simply how it works in China: the tap switches on, and it switches off, according to public holidays.

According to official statistics, mainlanders accounted for 480,000 of the 680,000 visitors who came in over October 1-7, a rise of 13% over the same period last year. But the biggest percentage jump was among Hongkongers, who were up 22% at 140,000. That has more to do with deflated numbers from last year, when the Golden Week did not begin on a weekend, than it does a boom in the city’s propensity to gamble, but it was surprisingly strong nevertheless.

We weren’t too concerned with the Hongkongers’ numbers, in any case, because we knew there was more than enough ferry service capacity to handle them. Our bigger concern, we must say, was that the Gongbei immigration checkpoint was bursting at the seams. On the first three days of the holidays, there were 1.8 million movements through there, including locals and Macau citizens resident or working in Zhuhai. The facility is built to handle only 300,000 visitors a day, and it showed when we paid a visit: long lines running back for more than 200 meters outside the immigration hall on the Zhuhai side. Given that arrivals from the mainland average around 800,000 A MONTH outside of Golden Week, readers can imagine for themselves what the place looked like trying to squeeze nearly 500,000 through in one week.

Now, we understand that mainland Chinese, except those from Shanghai, are born patient. They have lived all their lives with long queues, and do not expect much from officialdom when it comes to convenience and service. But every Golden Week it gets worse for them to squeeze through Gongbei, and we have to wonder at what point it simply becomes not worth the hassle of standing in line for nearly two hours to get in, when nearly half of all day-trippers say they have less than five hours to spare for their journey in Macau.

The Lotus Bridge connecting Hengqin to Cotai, meanwhile, looks like it was designed for use by a select group of VIPs only, judging by how little traffic it gets. And the river-barge crossing at Wanzai appears to be for dedicated Ponte 16 customers alone.

The reason for this bottleneck at Gongbei is not difficult to find. It is the terminus for every bus bringing passengers from Macau’s hinterland of Guangdong. Passengers get out underground and walk up two flights of crappy escalators, push past the throngs of DVD and Gucci touts inside the rabbit-warren shopping center, and line up in the plaza outside.

One might suppose the easiest way to fix this would be to get the bus companies to sell journeys that terminate at the Hengqin side of the Lotus Bridge, so that passengers can more easily access the property that three-quarters of them are going to visit at some stage on their trip anyway: the Venetian. Ah, so simple, and yet impossible to do, we understand. Too many vested interests in those bus companies. Too many vested interests in that underground mall, not to mention the duty-free shops inside the border zone at Gongbei. So the only solution, it seems, is to keep expanding Gongbei. At least until Hengqin itself has its own vested interests who need traffic once the resorts and hotels and convention centers and malls have been built out.

In the meantime, smart visitors will look for an easier way in at peak periods. But we wouldn’t be surprised if Golden Week visitor numbers disappoint this time next year. Stay tuned.

Used with permission and copyright to IntelMacau

Deutsche Bank’s Karen Tang appears to have set the cat among the pigeons with a report pondering whether Wynn Macau could lose as much as a third of its average monthly rolling-chip volumes to MGM. She maintains it’s a “bear-case scenario”, but we nevertheless have to assume she means it’s possible. The basis of her rather bold claim is that Neptune and Dawei (David) are putting in tables across the road as they gear up to start running much larger amounts through MGM thanks to aggressive credit terms and generous revenue-share deals.

We have no quibble with Karen’s hypothesis. If these two junkets decide to move a significant part of their play from Wynn to MGM, the effects will be serious for the world’s most profitable casino. However, what we also have to put up for consideration is the obvious question: what then?

We can see two scenarios unfolding. First, Wynn decides to do nothing, and takes the hit to see how long it will last, preferring to keep revenue-share deals with junkets the lowest in Macau and argue the case for quality. However, doing nothing does not mean nothing will be done. Although these are powerful and important junkets, they are not the only ones in Macau. If they don’t meet their rolling-chip volume targets at Wynn, they are liable to be replaced in the food chain by other junkets who have VIP customers pushing them for seats at a Wynn table. This may take a few months to unfold, but we can see how the “wu wei” Taoist philosophy might be effective in clawing back business without needing to cut prices.

The second scenario is more likely to induce anxiety in the marketplace. It is that Steve Wynn does decide to act because the bleeding is too heavy and the other junkets who have been clamoring for his rooms hold back in anticipation of higher revenue-share deals becoming standard. There are two ways he can go. One is to raise his payments to the junkets, which we think is the least likely. The second option is that he can flip them a finger and start raising his rebates to premium-direct players. Wynn knows this is a riskier move. But he has watched Sheldon Adelson stare down junkets out in Cotai recently by ramping his premium-direct business and he cannot be more than a little envious. The truth is that as more and more mainland wealth is parked offshore through Macau, more of it is available as collateral for direct-play, reducing concerns about debt-collection in China.

Moreover, can Dawei and Neptune really afford the risk of breaking with the best-run operator in Macau? Is MGM really worth taking that big a punt on? If we look at the track record of the two companies’ management teams, we would have to say at this stage that MGM looks like an obvious flash in the pan story. Any junket choosing it over Wynn in a longer-term scenario would be nuts.

Either way, we would not be betting against Wynn just yet. The wolves might be at the door, but he has plenty of food and water – and ammunition to boot.

Used with permission and copyright to IntelMacau

Extra:  Our apologies to the diminutive yet irrepressible Karen Tang. We misquoted her yesterday. The Deutsche Bank analyst, perennial leader of the gaming analyst scoreboard run by Institutional Investor magazine, did not say that Wynn could possibly lose 30% of its VIP business to MGM. She said the two junkets being wooed accounted for 30% of Wynn”s VIP business and, in a bear-case scenario, if they moved half of their monthly roll across the road, Wynn would lose three percentage points of market share. Sorry.

Lawrence Ho’s City of Dreams became a fully-fledged Vegas-style integrated resort last night. We weren’t invited, but from what we hear, the premiere of Franco Dragone’s House of Dancing Water went down very well with guests. Chinese media have generally been giving the show glowing reviews, even while most English media have been expressing skepticism over whether the show can be a financial success. As regular readers of this newsletter will know, we agree with both.

Without Jorge Oliveira, Macau might not have had six concessionaires. The former head of the Gaming Commission was instrumental in devising the clever run-around that enabled Galaxy and Las Vegas Sands to split their license, put US$900m into Steve Wynn’s pocket, and ensured the Ho kids had their opportunity to make dad proud. Even though his Canadian-bred boss was the one who made sure the foreigners ultimately understood how the game would work for them in Macau, it was Oliveira who put a veneer of legal respectability on proceedings back in the good old days before the Ao Man Long scandal. The face of the government to Wall Street, he was also a key figure in putting Macau on the map as an investment destination. While it lasted, that is.

As the Macau Daily Times reports in today’s edition, Oliveira, who was not renamed to the Gaming Commission by the new Chief Executive when he took power this year, is departing for personal reasons related to his father’s health. His contract runs out in a few months anyway. Talk of CCAC investigations appear to be just rumor, and Oliveira denied any link with Soconsult, the consultancy that the government publicly terminated earlier this year. To those who knew him, he will be missed. We feel easier knowing that David Green is back in public service, but Oliveira will be a loss anyway.

Used with permission & copyright to IntelMacau

David Green, the man who basically wrote Macau’s gaming laws for the post-STDM era, has been hired back by the government, according to Macau Business. The investigative magazine claims his package is worth US$250,000, which would be chump change for the esteemed consultant if it were a one-year contract. If it’s for shorter than that, we would have to wonder what exactly the big guy is coming back to do. We will be trawling Macau’s finest dining and imbibing establishments in search of him to get a quote ASAP, because he’s not answering emails. Stay tuned.

Used with permission & copyright to IntelMacau

Apologies for not issuing a newsletter in the latter half of last week. There really was nothing interesting going on in local news, and so we spent the time chasing some interesting leads behind the scenes. We were not disappointed with what we found. But we were somewhat perturbed. All sources suggest that we are heading into another price war in Macau, perhaps even bigger than the one caused by Amax and Crown (now Alitira) in 2008. It will take brave hearts indeed to get through the next few months without margins being eroded.

On the face of it, matters should follow a fairly predictable path. MGM Macau wants to do an IPO. Melco-Crown wants to prove that its management reshuffle was done for the right reason. Both need to get their revenues up, and the easiest way to do this is to spend heavily on marketing. And the easiest way to spend heavily on marketing is to give money back to the players who are coming to their tables. For as long as it lasts. Or rather, for as long as it’s necessary.

And so, we have revenue-share deals going up for the VIP rooms, and aggressive loyalty-card promotions going out to the mass market. Who will be the most aggressive of the two remains to be seen. But the results are showing up already.

MGM obviously has the most ground to make up, as it has lagged in sixth place on the monthly gross gaming revenue tables for the entirety of its existence. August wasn’t exactly a bang, but it was notable for a month-on-month pop in rolling-chip revenues of almost MOP5bn as some new junket players went over. The property also saw a nice 12 per cent MoM rise on its mass floor. We understand that this month will surely see another increase as more junket play is enticed by aggressive revenue-share offers and front-money handouts, while mass-market players are enticed by free buffets and lucky draws. Whether the win-hold percentages reward the aggressive initiatives will be interesting to see, but there seems little doubt that volumes are moving in MGM’s direction.

COD also had a good August on its mass floor — all those purple matchplay cards being handed out are clearly making a difference. Together with Altira, rolling-chip volumes jumped almost MOP10bn MoM for MPEL. The VIP team there says it is all down to sweat equity. We might believe that if its competitors were not crying blue murder about revenue-share sweeteners. We have no doubt that MPEL has one of the best VIP teams in Macau, but we also find credence in the argument that credit trumps friendship any day of the week in Macau. And so we look forward to seeing the AR numbers when the next quarterly results come out.

How the competition responds is the big question. Steve Wynn and Sheldon Adelson cannot be happy campers as they fly into Macau this week to ask their local managers what the response should be to this very deliberate balance-sheet onslaught. Venetian had an incredible summer, capped by a record August on the mass floor. Wynn held its own, too. But neither of them can be under any illusion about the fact that they are now islands in a sea of margin-cutting. They know full well that once revenue-share deals are raised, it’s almost impossible to reduce them later. But when billions of dollars start walking, it is tough to say who will be doing the talking.

Interesting times indeed. Stay tuned.

Used with permission  & copyright to IntelMacau