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The loss of lots 7 & 8 should not have been a surprise. 

LVS's 'loss' of sites 7 & 8 shouldn't be a big surprise.  Aside from the recent Macau government news on reclamation of undeveloped land, the fact that LVS has not yet been granted a land concession for sites 7 & 8 is also explicit in all of LVS's filings.  We have also heard for a while now that the Macau government would like each of the concessionaires to have strip facing properties, with the exception of Galaxy due to their development off strip. 

While it's clear that Sands had hoped that given their $6BN of capitalized investments on Cotai, history would repeat itself and the government would grant them the land concession for sites 7 & 8, the Company was aware of a possible rejection of the concession.

"Based on historical experience with the Macau government with respect to our land concessions for the Sands Macao and parcels 1, 2, 3 and 5 and 6, management believes that the land concession for parcels 7 and 8 will be granted; however, if we do not obtain the land concession, we could forfeit all or a substantial portion of the $102.4 million in capitalized construction costs, as of September 30, 2010, related to our development on parcels 7 and 8."

- September 20, 2010 10Q, page 36

In fact, despite having a land concession for parcel 3, should development on that site not be completed by April 2013, Sands is also at risk of losing that site.  Luckily, they have only invested $35MM into that parcel. Our contacts on the ground believe that it would be in Sands's best interest not to appeal and to possibly leverage off any good faith they build from not appealing in negotiations for a Four Seasons apartment deal.

In terms of implications for Sands China, we don't believe that this is a big negative since anything built on sites 7 & 8 would take billions to finish and wouldn’t open until at least 2016.  In addition, any opening would likely cannibalize existing LVS properties the most.  By then, there may be other opportunities for LVS to deploy their billions, like Japan.

The decision to reject LVS's land concession for sites 7 & 8 opens up an opportunity for both Wynn and MGM to move their plans on to the strip, and with the situation surrounding the Macau Studio City site still in the air, it may also open up an opportunity for SJM.

In terms of negative implications to Wynn Cotai, we don't really think there are many.  Wynn is in the process of developing their site now and they only have 1 site in Cotai.  LVS had 8 parcels in Cotai – with no definitive timeline for the development of its 3 remaining sites.  We don’t think that this is a departure from what the government has been saying for some time – basically, use it or lose it.  Remember, a lot of controversy surrounds many of these land grants/ "handshakes" that were done under the previous administration, especially around the award process or lack thereof.  The result was hundreds of parcels which companies are sitting on for over 5 years that are not getting developed--which is not good for the people of Macau or the government.  So bottom line--easy come, easy go.

Appendix of recent government announcements on the potential reclamation of unused land:

  • 3/22/2010: CEO Chui mentioned undeveloped land on Cotai Strip as high priority
  • 5/10/2010: The chairwoman of the Legislative Assembly’s (AL) Provisional Committee for the Analysis of Land and Public Concessions, Kwan Tsui Hang, said that 30 operators who are yet to develop land granted to them by the Macau government will be asked to explain the reasons for their inaction in writing.  Kwan stressed that the 30 cases are not only related to gaming operators.
  • 8/19/2010: Jaime Carion, director of DSSOPT, said the government has no timetable on when it plans to take back idle land.  DSSOPT has received replies from 26 concessionaires explaining why they have left their land parcels undeveloped, which are being studied by the bureau’s legal department.
  • 9/7/2010: SJM interested in sites 7&8. Sands China acting CEO Mike Leven said Sands "certainly will defend (its) positions on sites 7&8" and that historically when the government has allowed operators to invest in land, they've eventually gotten the rights to it.  However, recently, the government warned that undeveloped land on Cotai may be taken back.