We had been hearing via our mainland sources until recently that Beijing was comfortable with the red-hot growth in the VIP market, and that new curbs were unlikely, despite fears being broadcast around Macau to that effect. But we had not expected the reports in the Macao Daily News (Oumun Yatbo) this week that claimed officials across the border are actually trying to push people to visit Macau more by speeding up visa approvals. So we went back to our channels and this is the picture we got: yes, the reports are true, there is a policy coming down from the top that suggests Macau is a favored son again; moreover, bigger visitor numbers should help to balance the GGR numbers back towards mass, as the VIP percentage had been climbing. Additional thinking is that it would be wrong to sign the free-trade pact with Taiwan and not do something for Macau, seeing as so many direct flights are now bypassing the city.

But at the same time, reality is never that simple in Chinese politics. There is also a growing concern about the potential for the Sino-US relationship to get strained again, which might have an adverse impact on Macau, as Wynn Macau and Sands China play such dominant roles in the gaming industry. This was before Hillary Clinton showed up in Vietnam last week and announced that the US sees resolving disputes and easing tensions in the South China Sea as being in its national interests. Stay tuned, geopolitics at play here, folks.

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What board would fire a CEO just days before announcing that he had taken their company from second-quarter earnings of US$176m a year ago to just under US$300m in 2Q this year? No prizes for guessing. Yes, it’s true. Las Vegas Sands Corp. president Mike Leven fired Sands China CEO Steve Jacobs this morning, ahead of the Sunday arrival of chairman Sheldon Adelson for next week’s board meeting, at which it will likely approve a record adjusted property ebitda number of between US$280-290m, based on analysts’ consensus forecasts.

Jacobs’s sin, we have been led to understand, is that he believed the Hong Kong-listed subsidiary of LVS should have been operated in the best interests of all of its shareholders, not just the majority shareholders. Which meant, in other words, the Sands China board and executive team should have been able to make decisions that sometimes went against the wishes of the Las Vegas-based parent company’s leadership. How and why he thought this might have been a sustainable modus operandi, given the reputation of his chairman, is not for us to ponder here. The point is it was never going to work and once this path had been trod upon, the destination was inevitable. Sheldon Adelson owns the majority share of the company and we live in a capitalist society based on the rule of law. Just ask Bill Weidner what that means.

To be sure, Jacobs had his faults during the year he ran Venetian Macao Ltd, which became Sands China Ltd with its December 2009 listing. He wasn’t the most diplomatic of sorts, despite the wide grin, the bear hug and the death-grip handshake. He created a fair amount of ill-will locally with his aggressive style as he slashed jobs by the thousands and carved huge savings out of the company’s balance sheet. But that was his mission, as set by his masters, and he did it with aplomb. Sands China, which includes the Venetian, Plaza and Sands, went on his watch from being a lumbering grizzly bear to being a pit-bull in the market. There must be few people on the planet who could have done what Jacobs did there over the past year. For the first three quarters he focused on slashing fat. Over the past quarter, he has being working on toning his company’s revenue muscle and the results that come out next week will, we believe, show that he can be both a cutter and a builder. Premium-direct revenues, we understand, are now top of the market. Mass revenues are still way tops. The result? Ebitda numbers that no one can come close to, despite those monthly market-share numbers that show SJM with a 10-point lead in gross gaming revenue market share.

Who could possibly replace him? We understand that Irwin Siegel, a member of the LVS board, will step in temporarily while Leven conducts an executive search. We would have to assume that a local hire is out of the question, as the only person who could realistically step into this position at a moment’s notice has just finished unpacking his house in Australia, so he’s not likely to be getting on a plane this week. So it may take some time to find a replacement. The thing is, Jacobs ran Sands China so completely and utterly as an extension of himself that it’s hard to imagine how the place will function without him. He has a great executive team, no doubt. Kevin Clayton, Mark McWhinnie, Andrew Billany and Pete Wu could keep things ticking over while Jacobs was on holiday. But there is nobody on that team who could have stepped into the hot seat, even temporarily, if they had known he was not coming back from holiday. It is simply too hot a seat to sit in and they don’t make anywhere near enough money to do it.

The next-best person to Stephen Weaver would be his predecessor who now runs the Grand Lisboa, Frank McFadden, of course. But the man is still not even allowed to set foot on a Sands property, as far as we know. Would Adelson be humble enough to take him back and pay him a fortune, to boot? Doesn’t fit the character profile. So it might have to be another Jacobs-type MBA-toting larger-than-life personality shipped in from the US.

We wait with bated breath for the announcement.

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The news item that emerged yesterday in local media was that eSun had, in effect, had its subsidiary’s claim for US$2.39bn in damages against New Cotai LLC thrown out by a Hong Kong court. The clarification provided by eSun last night was that this was technically not true. The judge had, in fact, only given a ruling at the pre-trial hearing. The case will still be heard in court. However, it is hard to imagine that the verdict will be much different, given the judge’s clear leanings in the pre-trial hearing, and the language he used: words like “untenable” do not bode well for eSun at the trial, and it does not take a genius to figure that out. Read the Macau Daily Times report here and see the eSun statement here.

And yet, this case probably still has a long way to go. The initial ruling must give the New Cotai side of the fight – David Friedman, former legal point-man for Sheldon Adelson at LVS – cause for cheer as it opens eSun up to counter-claims for legal costs and other expenses incurred if eSun is found to have been wasting everyone’s time with a frivolous lawsuit. But it can only be seen as round one of a tough fight, if both sides are determined not to back down. And in the meantime, the clock is ticking on the Macau government’s patience as the best piece of real estate in Cotai stands silent.

This impasse should have been broken awhile ago. Back in 2008, we understand, it seemed to be close, as New Cotai reportedly made an offer to eSun at HK$1,000 per square foot of developable space to take control of the project. eSun must have thought about this for a nanosecond before counter-offering at HK$400, in effect telling New Cotai to go to hell.

The picture that has emerged so far is a fuzzy one, and we do not want to speculate too much on it as that might get us into trouble. But here is what we can imagine having happened. A man who owns a prime piece of land in the middle of the biggest gaming market in the world (or soon to be) brings in a smooth-talking foreigner with tons of gaming experience and gives him and his equity partners effective control over the casino part of the project. The foreigner is smart enough to get an iron-clad contract and once the man realizes what he has given away, it is too late to undo it. But this being Macau, the man believes it’s never too late to change a deal and so the two start to quarrel: the man, quite logically, wants the foreigner to raise more money for the project’s financing. The foreigner wants to do it the American way, which is to raise it bit by bit as share prices and interest rates fluctuate, while the man wants the money in the bank pronto. An irresistible force meets an immovable object and here we sit today reading a High Court judge’s opinions on the matter.

Now what? Well, as far as we can ascertain, there is only likely to be one winner in this case and that is SJM. There has been much speculation about No. 4 playing a hidden hand by buying up the Passport Capital stake in eSun recently, in anticipation of buying one or both parties out of the deal. We find that theory not very credible, mostly because No. 4 is now no longer the dominant force in the empire. It would cause too much internal angst were No. 4 to try this solo or with a non-family partner, especially as No. 4 now owns a casino on the peninsula outright and has reportedly bought another piece of land on Cotai as part of a consortium.

Far more plausible is the scenario whereby the government waits a bit longer, sees no solution to the dispute between the partners coming anytime soon, and takes back the land with the objective of putting it out to tender again. It would be legally tricky, but possible. And in that case, as SJM management have already made quite clear, they would be ready to bid. It would be a no-brainer: armed with cash, a track record of stable development, a dedicated employer of locals – which government secretary could deny they are the best candidate? Moreover, given the choice of selling out to the foreigners or giving the land away to fellow patriots, we can see how the man might consider the latter the better long-term political option.

How soon might this all play out? That is another question. Taking the land would be easier than putting it back on the market. With Beijing watching very carefully, the government is likely to tread ultra-cautiously. It could still be years before we even see a land allocation, never mind commencement of construction. But by then, the light rail will be up and running and Hengqin will be coming up, ensuring the Lotus Bridge starts to live up to its potential as it carries tens of thousands of visitors a day right into the back door of the piece of land currently owned by Cyber One agents and called Macao Studio City. Stay tuned: there is much at stake still to fight for.

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Visitor arrivals in package tours surged by 133% in May over the same month last year, according to statistics from the government. Mainlanders, who account for 75% of the total, were up 168% year-on-year. For the first five months of the year, however, the rise was just 23%. Notable rises were recorded by Japanese (up 86%) and Koreans (up 400%), continuing their takeoff since the beginning of this year (up 55% and 210%, respectively, for the first five months). Moreover, hotel occupancy statistics showed dramatic year-on-year improvement, too, with the average at 78%, up nearly 20 percentage points.

May last year was the bottom of Macau’s one and only depression since the gaming sector was liberalized in 2002. Outbound travel from China was in the doldrums due to lingering effects from the financial crisis (state-ordered liquidity was working its way through the system) and the swine flu scare made many people stay away from packed casinos where it might have been easier to contract the virus. The next month, everything changed: summer heat chased away the flu and Beijing decided that Macau needed a lift, so it eased restrictions on the IVS permits. So no one should get too excited about these year-on-year comparisons. Moreover, government press releases should always be examined for what’s missing, and in this case it was the month-on-month changes. Actually, May was a record month for gaming revenue but package tour arrivals went down slightly compared to April. This was not due to a slowdown in tourist arrivals, but was the result of a shift in its composition: overall arrivals were up 8% in May over April, because more people were switching back to IVS permits rather than coming in tour groups. It’s nothing to worry about, but is a peculiarity of Macau, given its heavy reliance on day-trip visitors.

That said, the hotel occupancy numbers are encouraging, and we are hearing positive feedback from hoteliers around town about July and August bookings, too. Indeed, compared to last year, when everyone just wanted occupancy rates to get back in the high-90s, the question on some resort managers’ minds this summer will most likely be a perplexing one: what kind of visitors do I want to have in my fully-booked hotel? Long-haul visitors from markets like India, or short-stay visitors from China who play a furious baccarat? It is a luxurious consideration, perhaps. But Macau is unique in that there is an enormous difference between the value of a gaming visitor and a non-gaming leisure visitor – far more so than mature markets like Las Vegas. That is why we get a bit puzzled when we see the big building on Cotai making strenuous effort to lure leisure visitors this summer, giving away very cheap packages for families of four. Is that really good for the bottom line? We have to wonder sometimes how much of a voice the casino managers have in such decisions. If gaming patrons can’t get a room at the Venetian or Four Seasons, will they still play there if they have to stay somewhere else?

The point might be moot, given how the Venetian’s mass floor has been heaving over the past week with day-trippers, and 3,000 hotel guests will be a drop in the bucket compared to the 100,000 people who go through that property on good days. We also buy the argument that mom and dad can always just drop the kids off at the entertainment center, and one family in a room equals two potential gamers rather than a single occupancy. But we would still question whether one dedicated gambler is not perhaps worth more in potential revenue than two parents who might spend a bit extra on better dining and shopping. Anyway, let’s see what comes out in the wash this July and August. We wouldn’t be surprised if this is the summer to beat all summers.

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Space sold by organizers of meetings, incentives, conventions and exhibitions (MICE) in Macau last year rose nearly 50% over 2008, according to the worldwide association that considers itself an authority on such matters. Admittedly, this was from a very low base: Macau accounts for less than 1% of Asia’s total MICE market, while China is more than half. Still, executives from the Global Association of the Exhibition Industry (UFI) are bullish on Macau’s potential, as they say global organizers are looking to Asia to grow existing events and launch new ones.

Macau’s potential as a MICE destination is barely scratching the surface. We’re not so sure about the likelihood of big trade exhibitions coming to the Venetian’s million-square-foot center, but we do think there are two areas of the business that have big upside ahead: corporate gatherings and consumer shows. It’s hard to compete against centers like Guangzhou, Dongguan and Shenzhen – let alone Hong Kong – for the big trade shows. As the statistics show, China accounts for 55% of space sold but only one-third of revenues in the region’s MICE business. However, consumer shows fit in with the city’s positioning as an entertainment destination. Think about events like gadget shows, or luxury cars, or boats, or private jets (which took place last month). From the viewpoint of organizers, it would be so much easier to do this in Macau than in Shanghai. Now that Macau is getting such enormous visitor numbers, organizers are starting to take notice. As has been proven in Las Vegas, MICE visitors are the best of all: they stay longer and they spend more. We just hope Sands China can get their new hotels built fast enough to offer the capacity.

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It was with some surprise that we opened the newspaper this morning to see the government admitting it had decided to punish a Cotai project for violating imported labor restrictions – and read that the project in question was not Sands China’s Lot 5&6. No, indeed, it was Galaxy Macau that came under the spotlight of the government’s labor administrators for hiring too many imported workers.

We are not 100% clear on the details of what exactly has happened. The Macau Daily Times story suggested that as many as 1,000 workers would be deported as the government had decided to cut the concessionaire’s imported labor quota. Galaxy sources have indicated that the issue is still being discussed and that the 1,000 workers were not actually employed, but would be taken out of their quota going forward – meaning, we guess, that managing director Jorge Neto Valente is working the phones. What seems beyond doubt is that Galaxy was one of several sites around Macau raided by the government recently and found to be in violation of the 1:1 ratio requirement for local workers. They cannot wiggle out of that so easily.

Could it be that the “local” concessionaire doesn’t have the political pull it once thought it had? If anyone can solve this problem, Neto Valente can. But it may well be that Galaxy is in a bigger rush to get its megaresort open in 1Q 2011 than the government is prepared to countenance. And it is plausible that the government’s priority of not rocking the boat with Beijing supersedes any considerations of fast-tracking anything for anyone in Macau right now, Galaxy included.

The company rushed out a statement for us saying that it was “doing its best to employ as many local employees as possible for Galaxy Macau’s construction development”, adding that it is a “priority to hire locals”, but would not provide further details. Other sources spoke off the record and said this was not a big issue, irritating though it might be. We empathize. though we don’t think there is cause to be blase about any of this. The government’s restrictions on labor imports are the stuff of Wonderland (Alice’s version). But Wonderland is the reality every concessionaire must live within, and we find it hard to believe this will not have an effect on the timeline for the megaresort’s completion if not resolved soon.

Is it a reason to dump the stock? Not in our view. We have concerns about the Galaxy management team’s depth in mass marketing experience for a Chinese audience, but we have no doubt about the quality of the property and how well it will be perceived when it (eventually) opens. Never mind the wave pool: we too cannot understand why they put that in the design. It’s the whole package that counts. Despite being on the back-end of Cotai, and not an easy stroll from the Venetian, we think the allure of the golden cuppolas will be enough. A delay in its completion might even be a blessing in disguise, as it will give the marketing team more time to figure out the difference between Dongguan and Guangdong. Stay tuned.

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Macau’s casinos don’t know their customers, their marketing teams are not very efficient, and there is a looming overcapacity crunch that could see a shakeout if current market conditions turn downwards. That, in a nutshell, is the delivered wisdom of Sudhir Kale, professor of Marketing at Bond University’s School of Business in Australia and a visiting professor at the University of Macau.

In an interesting interview with the Macau Daily Times, the Australian academic – who just happens to have a consulting service that could, for a fee, solve all these problems for the concessionaires – makes some valid points. Macau’s marketing dollars are in many cases not being spent in a very accountable way. The quantity and quality of consumer research being done here is pitiful – something our company, ahem, has been trying to rectify, too. And if, heaven forbid, Chinese gamblers were forced to start choosing underground casinos closer to home rather than the bright lights and dim saunas of Macau, there would indeed be one or two operators caught with their pants down, figuratively speaking.

But, as always, the devil is in the details where any prognosis of Macau’s market is concerned. There are big and growing differences between the operators, for a start, and we take issue with Kale’s assessment that none of them know their customer while only two – SJM and Wynn – would be prepared to survive a serious downturn. We will be producing an in-depth survey of Macau’s brands later this month in conjunction with Deutsche Bank, and will go into greater detail then for our readers. Suffice to say now that the big three properties – Venetian (Sands China), Grand Lisboa (SJM) and Wynn Macau – are clear leaders in their categories, and visitors have a strong understanding of their brands and value offerings. The flagship properties of the other three have a way to go to catch up, and are sometimes guilty of doing too much guesswork which has led to too much trial and error. But at the same time, it is hard to know what else they could have done under the circumstances, and we do see evidence of a growing understanding among all three – City of Dreams (MPEL), Galaxy Macau (Cotai project pending), and MGM Macau – that they need to do more to know their customers before offering them something they will not necessarily accept enthusiastically. Moreover, they are making serious money despite being in fourth, fifth and sixth place, this market is still in its infancy, and its core customer base is showing an incredible ability to evolve and mature its understanding of new value offerings presented in Macau, with the rise of per-capita shopping spending being the foremost indicator of this. Trial and error is a necessary component of any business plan here at the moment.

The most important question that Kale raises, however, does need closer consideration. Is Macau heading for a glut of capacity that would bring down or seriously impair any of the concessionaires if current market conditions were to suddenly deteriorate? Our answer would have to be an emphatic no. Serious challenges lie ahead for Macau in improving its infrastructure and raising its profile as a leisure and MICE destination, but demand among gaming visitors from China is going to absorb the capacity coming onto the market for the foreseeable future. This might not always happen at a pace the concessionaires consider ideal. There will be bumps, there will be ups and downs, but the arrow on the chart is pointing sharply upwards for the next decade as China continues its march towards middle-income country status. Hotel occupancy rates are back in the high-90s. Mass gaming floors are bulging. To not build new capacity now would be irresponsible.

Even if a big bump comes, who would not be able to survive it? Sands China is not going to make the same mistake as it did in 2008 by being over-leveraged, and its positioning in the mass market and premium-direct is the most sustainable. Galaxy is a company known for cash-hoarding management and conservative investment decisions. MGM Macau is probably heading for some structural changes ahead of or during its planned IPO, but Pansy Ho’s personal financial resources are beyond question. Melco-Crown may be the Ethan Hunt of Macau’s gaming market, having performed one seemingly mission impossible after another to get where it is today, but its finances are in sound shape now and City of Dreams is kicking off enough cashflow to assuage its investors fears; all it needs to do now is grow into its skin out there in Cotai.

The picture is not perfect. There is lots more for the gweilo-heavy management teams of the Big Six to learn about their predominantly Chinese customers, and there is lots of opportunity ahead for smart locals to step up and teach them. There will be winners and losers, and market shares will shift as new properties open. But we have never seen such an intensely competitive business environment anywhere on the planet. And where there is competition, there is progress. We see faster progress ahead than many observers, Kale included, could possibly appreciate right now. Stay tuned.

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Macao Dragon launches its long-awaited gigantic ferry service this weekend, after months of speculation and a government-imposed deadline of July 14. According to a report in Macau Daily Times, the service will launch with five trips a day between the Hong Kong Macau Ferry Terminal and the Taipa Temporary Ferry Terminal. Two boats with a carrying capacity of 1,152 (more than twice the size of Venetian’s CotaiJet ferries) will ply the route, though they will start with just 600 passengers each for “safety reasons”, a company spokesperson said.

It might be tempting to believe that the new ferry service will erode the Venetian’s competitive advantage in Cotai as more visitors travel on non-Venetian ferries. The reality is that these boats will probably do more to help the big integrated resort squeeze in increasing numbers of visitors on the weekends. No details have been released yet on tickets, but they are probably going to be price-competitive for tour groups: how else does an operator fill such a huge boat five times a day, each way? Which is great for the Venetian, as it doesn’t need to subsidize these cheap fares itself and it will have extra capacity available on the Cotai route for peak times, such as popular concerts on Saturday nights. Expect City of Dreams to benefit, too, as tour-group operators push their customers to Cotai.

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Editor: Operations had resumed as at time of posting.

The first choice of transport to Macau by super-whales has been shut down until Sky Shuttle can figure out what went wrong with the helicopter that was forced to land in the Hong Kong harbor on Saturday. No one was hurt, but 11 passengers and two pilots were plucked from the water after the helicopter was forced to make an emergency landing when the pilot heard a loud bang and decided he could not control the craft well enough to land back on the helipad.

No one doubts the determination of Chinese gamblers, especially those with tens of millions to play, to get to Macau when they feel the planets are in alignment or they have seen an omen. And the ferry is not really such a torture. Mainland-based whales will be coming by car through Gongbei, anyway. So we understand why most of the operators we contacted are putting a brave face on the loss of chopper services – for now. This accident does, however, raise attention to the fact that Macau is overly dependent on a monopoly provider of air services, both in helicopters and jets. We don’t think Wynn Macau or Sands China would be so interested in following the lead of now-bankrupt Viva Macau and try to start up an airline, but a helicopter service of their own would be a no-brainer if allowed. Sands would obviously be in pole position for an application, considering its experience in running ferries. Teaming up with an established helicopter service operator like the Kadoorie family in Hong Kong would be easy. Could this incident be the pretext needed by the Macau government to put another license out to tender before the Pac On terminal is finished in 2012? Stay tuned.

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The Grand Lisboa can’t yet get the relevant licensing authorities to understand the immense cultural value of moving Robuchon a Galera up from the old Lisboa to the top floor of the new one, we understand. Nevertheless, management is pushing ahead with plans to open the Grand Lisboa’s ninth and tenth floors this month to a host of new entertainment facilities that do not, er, involve gambling, and they will be ably supported by a staff of more than 200 residing in rooms on the floor above. We understand the karaoke rooms opening there are an essential part of the group’s masterplan to drive those fiendish foreign devils from Macau’s shores. Providing some distraction for players who have already been through a hard day’s night on the baccarat tables ought to keep them from going to a rival property: anyone who has just given up a few million to Stanley Ho would surely welcome the chance to sing and drink his worries away. We get it. Look for 3Q ebitda gains at the iconic flower-shaped property.

If you think the foreign devils are sitting on their hands, however, think again. Wynn will likely never again go down this road, with memories of Tryst fresh and a preference for in-room entertainment anyway. But we can’t wait to see what both City of Dreams and the Venetian are rolling out this summer. We keep hearing about the 20,000 sqm Cubic nightclub and a Hard Rock Cafe at COD, while the Venetian is supposed to be knocking down walls soon to unveil massive new nightclubs, too.

As we have already seen from the new bar at the Mandarin Oriental, however, delivering on the service side of a new watering hole is always going to be a challenge in Macau, given the shortage of locals interested in the entertainment-service industry and the difficulty of getting imported worker quotas. We wish these operators all the best of luck and hope they will get the results they are looking for.

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