A TIRING BUT ENLIGHTENING WEEK IN MACAU

And I thought Vegas was a draining trip.  I'm writing this Macau update on the Friday flight back from Hong Kong.  Five days, 15 meetings, and only 20 hours of sleep later, I'm tired, but full of thoughts and observations from a very enlightening trip.

Near term, I'm more negative on Macau, especially on LVS, and to a lesser extent, WYNN.  Our estimates will be going lower on both companies.  Sands, in particular, may get drilled by SJM's Oceanus property opening right next door.

We're still working on the MPEL model - our numbers will be below the Street but nobody believes the Street numbers on this one anyway.  Sentiment is extremely negative on City of Dreams and MPEL which is understandable given the slow start.  The stock has been pummeled.  However, there are reasons to be optimistic as the launch of the VIP effort tonight, and the advertising in China, could drive revenues to leverage what appears to be a lower cost structure than most are projecting.

We will expound on the major takeaways in coming posts but here are our observations:

 

MACAU MARKET

June: 

  • Macau not having a good June
  • June visitation may have been down 20%, similar to May
  • MGM and Grand Lisboa may have been the only major properties to have a decent June
  • Some of the junkets experienced very high hold % in June

Mass Market:

  • Cost of player acquisition and retention going up on the Mass side - margins going lower
  • More evidence of increased rebate activity: "Front end buy in" vs. "Rolling buy in" - 1% rebate on wagering above a certain level vs. 0.3%-0.4% on all dollars wagered - Mass margins could be under pressure
  • Growing belief that Beijing will "manage" Mass growth to coincide with GDP growth in China. Good for stability but the days of 15% growth are over. Over the long-term, predictable growth is probably worth a higher multiple

Visa Restrictions:

  • Beijing tightened up tour group restrictions in June after a few months of abuse - players were skirting visa restrictions through tour groups
  • At least one enlightened participant does not believe a new CE means that visa restrictions will be loosened, despite consensus opinion
  • New CE is not a "guy of change". He is already the 2nd most powerful government official in Macau and is probably not Beijing's first choice
  • Nobody knows what is going on with visa restrictions. Beijing probably cracked down on tour groups but some think that other restrictions may have been loosened. Any impact will be masked by Swine Flu concerns

Other:

  • Over the near term, there are more negative catalysts: lower margins due to market share competition, CoD taking share, and L'Arc and Oceanus (SJM) opening this year
  • Delays in Galaxy's Megaresort good for the market

 

LVS

Competition:

  • I'm increasingly worried about Sands. SJM really going right after the property with Oceanus opening late this year
  • Oceanus will open near Sands, right next to the Immigration Center - covered moving walkways right from Ferry Terminal to Oceanus
  • Sands and Venetian continue to lose VIP share to Jack Lam's Mandarin Hotel operation
  • Venetian Mass business hanging in despite City of Dreams opening - that could change with the new CoD advertising program launched this week in southern China

Financing:

  • IPO is most likely financing option
  • No asset sales are imminent
  • Government approval for condo sales will be a long way off - no source of cash for LVS

Singapore:

  • Singapore doesn't look like it will open in 2009, April 2010 more likely
  • Junket guys worried about Singapore regulations potentially limiting or prohibiting Junket activity - junket credit, private rooms, background checks - we believe this is potentially a big negative for the two Singapore concessionaires

 

WYNN

  • Wynn Macau not having a good June, losing share to MGM and SJM
  • High VIP commissions elsewhere and Mass rebates/higher customer retention costs causing market share losses
  • Wynn Macau also lost a huge high end slot player to MGM and City of Dreams
  • Encore Macau won't open until the spring and the budget is likely to go up a little
  • Not impacted much by CoD yet, but CoD business beginning to ramp in both VIP and Mass
  • No real positive catalysts for WYNN in Macau

 

MPEL AND CITY OF DREAMS

  • Mass volume in first two weeks was below expectations but hold % was reasonable
  • VIP volume was fine but hold was actually negative
  • Negative VIP hold % (-0.5% to -0.7%) due to 5-6 players, not widespread through the casino - not sustainable
  • Mass volume has picked up recently
  • Structurally, there does not appear to be any issues with CoD
  • The only legitimate criticism I heard was that the property is difficult to navigate
  • Margins will be much better than expected - probably due to correct staffing and lower wages - 75% of what they expected
  • Revenues ramping and won't be far off near-term expectations
  • The Hard Rock Casino is probably the most unique in Macau
  • Hard Rock doing 60% more per position than CoD casino
  • Rolling Chip (VIP) launch is Friday night
  • The go ahead for advertising in China was given on Wednesday - only 13% of customers are from mainland, needs to be 30%
  • Have not gotten the mid-Mass business yet - advertising in China will help
  • Signing 2,000 Mass customers into City Club database daily - faster pace than the Venetian after 3 weeks
  • Former Venetian marketing people running the database
  • Generally positive commentary from competition
  • Given the stock performance and the incredibly negative sentiment, MPEL is starting to look interesting on the long side

 

SJM

  • Market share still growing, revenues stable
  • Margins lower due to customer acquisition and retention costs
  • L'Arc opening on 9/21/09 - apartment sales not going well (though not part of SJM's financial involvement in the project)
  • Oceanus - 280 mass market tables opening up by end of year - going directly after Sands business
  • Oceanus will be much more accessible to customers arriving at Ferry Terminal than Sands
  • Ponte 16 - doing very well. Casino was packed. Exclusively mass market for now

 

IGT

  • New games doing well in Australia
  • Similar games being introduced in Macau and competitor thinks they will do well

 

MGM

  • Being very aggressive, especially going after Wynn Macau's business
  • There seems to be more optimism surrounding the performance of this property
  • They seem to believe that $250 million in EBITDA is possible
  • Shun Tak's retail center will open in late 2009 and should be a catalyst for the property

 

GALAXY

  • Starworld lost share in June due to renovations and low hold % in June. However, property seems to be stable
  • Construction on Megaresort deliberately being slowed due to cost savings and market conditions
  • Construction costs may come in 10% below projections - running single shifts, no overtime pay
  • Will target Mass business from mainland China
  • Transportation infrastructure will be much improved by the time the property opens
  • No official opening date but 2011 looks likely