How does a property go from 14% to 18% market share faster than a speeding bullet? By opening 400 new suites designed for premium players, that’s how.

Wynn Macau president Ian Coughlin has a lot to be happy about. Since opening Encore, high-limit and rolling-chip players have been flocking to his property to see the jellyfish in the tanks behind the check-in counter, feel the butterflies embroidered into the silk wallpaper, and throw down millions of dollars on his tables. There was a point last week when his market share overtook that of Sands China; it was fleeting, but must have been euphoric nevertheless. Last time we checked, Wynn had 18%, just behind Sands at 20% and SJM at 29%.

And yes, the reason appears to be little more than having 400 very nice suites to offer high net-worth players. And some nice wallpaper. And 250 attractive staff to take care of the premium players.

Seriously, greater attention needs to be paid to hotel room inventory management now in Macau. Anyone who thinks Lot 5&6 will be bad for Sands China needs to rethink the maths on that project. Because it is becoming crystal clear, as Wynn is showing, that rooms (and the service that goes with them) is becoming a very much more important factor in the most lucrative part of the market: high-limit mass and direct-VIP. It matters less how many tables Sands can get in there under the 5,500 cap than it does how quickly they can get the rooms online. This past week, the 3,000-room Venetian was 100% booked, as was the 400-room Four Seasons and 8-mansion Plaza. Where does a premium player go if he cannot get a room? The obvious answer is: elsewhere.

Readers might be forgiven for thinking to themselves, “Yeah, duh!” But this has not really become so apparent until recently, partly because of the public fixation on the market-share numbers, which are driven by junkets. Rolling-chip play through the junkets is more dependent on credit and commissions than it is on room availability, because the junkets can get a room for their players anywhere. But a property that wants to play direct with whales in Macau has increasingly got to be able to deliver the rooms – even if these players might not use them for more than a few hours per trip. Wynn and Sands are staying in the revenue-share game with SJM, despite having lesser rolling-chip volumes, by building this ebitda-rich part of the business aggressively, especially from the mainland. MGM and MPEL, by contrast, are not, and we fear they might fall further behind as they rely on the established VIP markets of Hong Kong, Japan and Southeast Asia, being too timid (or otherwise) to extend credit where it would be most effective in developing direct-play growth. (Galaxy is, for now, SJM by another name in its business model with junkets, in our view.)

Which might explain why Steve Wynn is so keen again to get going on his Cotai project. As much as Encore has given his numbers a boost, he knows well that demand is going to outstrip supply again very quickly on the peninsula over the next few years. He will not likely have more than 400 tables in Cotai. But he will need more rooms than he has on the peninsula in order to keep his place atop the totem pole of premium play in Macau as this segment of the market grows and matures. Plus a few more butterflies here and there. Stay tuned.

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Information from the Statistics and Census Service show visitor arrivals in package tours jumping 20.3% year-on-year to 572,157 in April. Around three-quarters of these were from the Chinese mainland, up 18% over the previous April. Koreans and Japanese were up strongly, too. Meanwhile, overnight guests staying in formal accommodation (i.e. not in saunas) totalled 664,286, up 15% over the previous April. More than half came from the Chinese mainland, while 23% were from Hong Kong. Four-star hotels had the highest occupancy rate (87%), pipping the five-stars at 81%, while the average length of stay was 1.4 nights.

Package tour demand has been strong indeed, but don’t be fooled by the numbers pouring out of the mainland. Package tourists from China are not the high value-added visitors that everyone salivates over from Korea or Japan. They are very often day-trippers coming in with their rucksacks and baseball caps provided by CITS, and they have very small bankrolls. You don’t see them at Wynn; they mostly go to the SJM casinos and the Venetian, where they take tours of the Grand Canal Shoppes and pool their savings to bet on the HK$100 baccarat or sic bo tables. That said, Macau needs more of them: there is still plenty of space out on Cotai to grow into. And the hotel occupancy numbers are welcome, too. Those are indeed higher-value visitors, even if the majority of them are comped. In fact, it’s becoming obvious that there aren’t enough hotel rooms to go around at the moment for the higher-end players. Encore and Four Seasons, for instance, are hard places to get a booking. Bring on Galaxy Macau, with Okura and Banyan Tree, and Lot 5&6, with Sheraton, Shangri-la and Traders, we say.

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According to a report by Macau Business, Finance Secretary Francis Tam has said that Wynn Macau hasn’t yet applied for the new gaming tables the company expects to include in its Cotai project and, in any case, the government will not accept any new applications for tables until March 2013. That would mean Wynn won’t know how many gaming tables his Cotai project can have until a year before it is due to open, by which stage its construction will be quite advanced. Tam also affirmed that the current number of tables in operation, 4,770, would rise “gradually” to a maximum of 5,500, the government’s cap announced earlier this year. Wynn said last week that his new casino is expected to be completed in 2014 and will feature no more than 400 to 500 gaming tables and 1,200 to 1,800 slot machines.

Why is Francis Tam speaking publicly about Wynn? It might be nothing, just a response to a reporter’s question. Yet it might also be feedback: don’t think that coming out in public and doing some right royal arse-kissing (as Wynn did last week) is going to get you special treatment in the form of a private commitment on a certain number of tables that you can build into your masterplan for Cotai. The days of “comfort letters” from the Pink House are over, we understand. And it’s not just Wynn that’s hearing it. Even local property developers close to the previous administration and official advisers to the current chief executive are being told that No Means No to requests for plots of land to be rezoned. This administration is going out of its way to toe the line with Beijing and does not want to risk anything that might result in increased scrutiny from across the border.

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One of the other things that McFadden said yesterday, which led to a Reuters report, was that SJM expects a softening of VIP revenues in the second half of the year. His logic is unassailable: as property prices freeze or fall, so VIP gamblers will cut back on their bankrolls out of uncertainty about their net worth.

We are going to stick to our guns on this one, however. For now. Until we see clear evidence of a fall in property prices on the mainland (they rose 12 per cent in May, by the way), we are going to say that demand will remain vigorous in the second half, and gross gaming revenues will continue to climb strongly year-on-year. June has certainly seen no slowdown, with revenues in the first week up 70 per cent year-on-year. Karen Tang of Deutsche Bank is on message, too: she released a report this morning saying she thinks significant upgrading of target prices is required by “the street”, and she herself expects 50 per cent year-on-year growth in gaming revenues for 2010.

We still think the MOP20 billion-a-month mark will be broken by October. Why? Because uncertainty about government regulations governing the property market is not the same as uncertainty about net worth. We believe that the high-rollers and capital-flighters driving current demand see Macau as the best place to be parking their money until Beijing starts issuing clearer directives on what it wants to see happen to asset prices on the mainland. And with Europe in the toilet, do we really expect Beijing to be austere for the foreseeable future? So the junkets will continue to be awash in working capital, credit will be plentiful, and the sun will continue to shine in Macau. Stay tuned.

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Saved at the whistle. We were just about to write the G2E Asia expo off this week as having been a huge yawn, and then we arrived for the CEO session, the last of the final day of the conference. Up on stage was Frank McFadden, boss of the Grand Lisboa. For a former professional rugby player, the big Irishman always surprises us by how articulate and clear-thinking he is. So we were rapt from the first minute, and paying careful attention by the time he announced that SJM was stockpiling cash and would have about HK$14 billion on hand by the end of the year with which to make a bid for a plot of land on Cotai if one were to become available.

It reminded us of that song by the Monkees: “And then I saw her face … Now I’m a believer.” Indeed, we have been waiting for awhile to hear from SJM what exactly their plans are for future growth, because we were under the impression that they thought Cotai to be a flop. They had announced before the 2008 global financial crisis that they were going to do a small property on Cotai on the piece of land amazingly cut out for them from the back corner of the Macao Studio City lot. But then they shelved that last year, along with plans for redeveloping the old Lisboa site. So we had to double-check with McFadden: are they now thinking along the lines of big is better and Cotai is where the future lies?

What he said wasn’t a resounding yes. But again, that’s one of things we like about the man. He’s not prone to superlatives. “We are a gaming company. We are good at what we do. We recognize the need to evolve.”

So, what could we expect from an SJM development on a parcel of land, oh, say, the size of Macao Studio City’s? “People don’t come here for a beach holiday. (Wonder who that could have been referring to?) People come here to gamble. They need good hotel rooms. They need good food. They need to shop. Not all of this needs to be done at the five-star level,” he said.

The key, he added, as perhaps a note of caution to manage expectations, will be timing. Cotai is growing fast, no doubt, and SJM recognizes the success of the Venetian in creating demand for mass-market experiences there, which has been great for margins. But oversupply concerns are legitimate, too.

Still, it is clear that the ball is now in the government’s court on Cotai’s development. Speculation continues to swirl that the government will take back undeveloped parcels and re-allocate them. If this does happen, no concessionaire is going to want to be left out of the process. From where we are sitting, SJM would be in pole position to get the best piece of it.

Used with permission and copyright to IntelMacau.com

Juding by his tan, Michael Chen must have a very hard life running the Caesars golf course in Macau while waiting for a crack to open in the Gaming Law that would allow new sub-concessions to be granted to outsiders such as his parent company, Harrahs Entertainment. It was briefly made that much harder yesterday when a Reuters correspondent misquoted him as saying at the G2E Asia conference that Harrahs “believes” rather than “hopes” it will be allowed into the gaming market. The agency corrected the mistake later, but not before it raised a few eyebrows. Everyone knows that Harrahs has been knocking on every door and kicking every tyre in town to see what deals can be done to get a toehold in another property, as it would appear that the golf course is not going to be allowed to build a casino on it anytime soon.

Not much else interesting was said at the conference on its opening day. Francis Lui, boss of Galaxy, noted that VIP growth is unsustainable in the long term and that the future lies in China’s middle class. Which might, just might, explain why his company is building a big resort in Cotai. Tom Arasi of Marina Bay Sands said his resort will be fully open by 1Q next year. Bloombury of the Philippines said its new Steelman-designed resort in Manila Bay will be open in late 2012, and it does look like an impressive project; and a survey of “experts” produced by Future Watch predicts that Macau’s boom will continue unabated for the next decade. Today should be more interesting.

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News:On revenues of HK$3.95bn, up 51% from 1Q09, Galaxy Entertainment Group saw ebitda in 1Q10 jump 79% year-on-year. StarWorld was the driver, with ebitda of HK$369 million up 67% due to cost controls and surging VIP volumes, delivering an annualized ROI of 35%.

Analysis:Galaxy management claim the the good performance at StarWorld was due to: “The quality of the property, its established reputation as a leader in the VIP market and GEG’s famous ‘Asian Heart’ service.” The reality is that it runs on margins (18% under US GAAP) that are far lower than Wynn, MGM, Sands and Grand Lisboa on the peninsula, never mind COD or Venetian in Cotai. It does so because it is, essentially, a boarding-house for powerful junkets who are running with the bulls at present as cash outflows from China show no signs of abating. StarWorld’s mass revenues pale in comparison to its neighbors, and its direct VIP play is not worth mentioning. That said, the ROI numbers are not to be sniffed at. Management are cautious, and this caution has served their shareholders well to date. And those ever-rising VIP volume numbers are not to be dismissed lightly, either. The question is whether this group can make its Cotai project work. Great-looking property, but different ball game altogether. Management did well to raise HK$9bn from the capital markets before they froze again on troubles in Europe, and we wait with eager anticipation to see how well they can put it to use in a mass-market property.

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Overall, there is much for the Big Six to be happy with from May, as everyone benefited from the rising tide washing out of the mainland. Wynn did a bit more, thanks to Encore, but moving from 14% to 16% of the market might also have something to do with it being, in the words of its founder, a “more Chinese company” since the Hong Kong IPO.

To be sure, it is unarguable that the biggest gainers from the recent runup in volumes, which absolutely exploded in May, are the “Chinese” companies established in Macau. (Never mind Wynn; he’s in a different ethnic group altogether.) The troublesome Israeli-Americans are having a whale of a time on their mass floors, and the two half-breeds are holding their own with a mixture of rolling-chip and mass, but the really big rolling-chip numbers are being clocked up by the SJM satellite casinos and, to some extent, StarWorld. Which means that the really, really big winners at the moment are the guys who are holding between 40 and 57.5 per cent of revenues passing through their cages: Jimei (unlisted as yet), Neptune, Dore, Sun City and all the rest of the, ahem, intermediaries who make Macau such an important cog in the rising economic machine of China. Loyalty counts; patriotism pays.

At the top of this patriotic pyramid sits a company that currently trades at half the valuation of its peers. Even despite the runup in its shares this week since the AGM, when it punched through the HK$5.25 mark at which its convertible bonds kick in, SJM is a steal by anyone’s reckoning. CEO Ambrose So said he thinks the market can do more than MOP150bn this year and people gasped. We think he’s being ultra-conservative: Macau has already done more than MOP70bn in the first five months, and the trajectory is pointing sharply upwards – anywhere between MOP170bn and MOP190bn would not be unthinkable if the current liquidity conditions are maintained. You heard it speculated here first.

The question is whether the current liquidity conditions can be maintained. At the moment, here is what we see happening: 1) Regulatory uncertainty in China — 2) Money needing a safe haven — 3) Money ending up offshore, but with nowhere to go — 4) Junkets offering double-digit returns on investment compared to less than 1 per cent at the local bank and risky Hong Kong stock and property markets — 5) Surging credit lines fueling surging rolling-chip volumes — 6) Outsized returns for the junkets — 7) Repeat Steps 3 to 6.

Not a day goes by when we don’t hear someone say, as if on cue, “But this is too hot; Beijing is bound to crack down.” Anyone who says that does not understand the fundamentals of what is going on right now in Macau. The foreigners are getting their piece of the action, no doubt. But at its core, this is a grand case of Chinese paying Chinese and everyone making hay while the sun shines. Guangdong is happy: all the irritants that preceded the mid-2008 crackdown have been removed, the periphery knows better how to behave appropriately in dealing with the center, and there is harmony in the land – or, at least, in this corner of it.

And while everyone is getting paid, a single company is getting a piece of one in every three transactions. Granted, it might not be as big a piece as it used to be, but the pile onto which every piece gets tossed is growing bigger than it ever could have been imagined back when SJM, then STDM, was forced to give up its monopoly.

Now, we have to admit that there are three good reasons why SJM’s share price has always traded at such a steep discount to its peers. One is the relative lack of transparency in its reporting, which was a fair accusation until last week when it released 1Q10 results. The other was the pitiful number of shares in circulation, which has finally been addressed by the convertible bond kicking in. The third has been touted by international fund managers as being the biggest reason: uncertainty over the succession plan in the event of Stanley Ho passing away.

So here is what we think these fund managers need to be asking themselves right now. What if the succession plan has been decided? How much should that erase from the discount? Because from where we sit, it is as decided as it is ever going to be. This was apparent at Monday’s AGM. Dr So runs the show, his co-directors, including Wife No. 4, play an important role in how that show is run, and the royal family will control the proxy votes of STDM, keeping the management team under close observation. The satellite casinos have the sweetest rental deals in town, as do the junkets operating at the Lisboas, so no one is splitting anytime soon. Everyone in this picture is mutually incentivized to get along, and STDM/SJM has the blessing of Zhongnanhai as long as they continue to do so. We wish Dr Ho the best of health, but we, for one, no longer fret about his passing.

Used with permission & copyright to IntelMacau.com

News: According to Bloomberg, a report in the Chinese-language Economic observer says Shanghai will introduce a property tax policy on a trial basis next month. The report is believed to have caused a 5% selloff on the Shanghai Stock Exchange yesterday, although it didn’t identify the nature of the tax and said only that more detailed policies may be announced at a later date. It seems that this is a local issue, not requiring approval from the central government. In a separate video interview, however, Bloomberg also has a very interesting chat with one of the country’s biggest real-estate developers, Zhang Xin of Soho China, who said greater clarity was needed on policymaking towards the real-estate sector if trading is to recover. She was not worried about price falls, as developers are cash-rich and she believes that as soon as clarity returns to policymaking, trading activity in the market will come back strongly.

Analysis:We know there are bears lurking out there who are worried that Macau’s gaming revenues are going to come back down to the monthly MOP12-13bn range in 4Q, as the junkets who fuel the industry are so dependent on property values in China for collateral on the credit they acquire and extend to players. We too are concerned about the ups and downs of policymaking in China towards the property market at present. But as this Bloomberg report and interview show, it is far from sure that prices are going to collapse anytime soon. Trading activity has indeed declined in first- and second-tier cities, which would normally foreshadow a drop in prices once developers’ cashflow does begin to be squeezed. But this is China, where normal economic theories do not always apply. The current clampdown, including the speculative report about a property tax on residential properties in Shanghai, has much more to do with politics than it does economics. This is in contrast to past downturns in property prices, which have been initiated by genuine falloff in demand, and which have had genuine knock-on effects in Macau. We do not think it is time to short Macau gaming stocks.

Used with permission & copyright to IntelMacau.com