A cordial lunch between rival casino magnates Stanley Ho and Sheldon Adelson last month, which was followed by “ceasefire talks” between casino players in Macau, may signal less cut-throat competition in the world’s biggest gaming market.
Meanwhile, statistics from the Macau Gaming Inspection and Co-ordination Bureau show that the deteriorating outlook for the Macau gaming sector has stabilised somewhat, with total industry revenue coming in at 26.3 billion patacas or HK$26.3 billion ($5.1 billion) in the first quarter of this year, or an average of HK$8.77 billion a month. While 1Q gaming revenue was still 13% lower y-o-y, revenue actually increased by 8.1% compared with the preceding quarter’s 24.1 billion patacas.
A “ceasefire” and improved revenue figures may be comforting for investors who want to have another look at major casino stocks in Macau, once a market dominated by Stanley Ho.
Ho, the major shareholder of HKEX-listed SJM Holdings Ltd, and Adelson, owner of NYSE-listed Las Vegas Sands Corp, met on April 14 for a two-hour lunch to put aside their rivalry. Two days after the lunch, Ho, Adelson and other casino operators met in a closed-door conference for a similar purpose.
Industry analysts speculate that SJM, LVS and other casino operators in Macau were trying to reach an agreement on “a complete freeze on salaries, to stop poaching from each other and uniform rates for junket operators who bring high rollers to Macau”, wrote Bloomberg.
“Everyone agreed not to compete, to have enough rice to eat and to get more taxes for the government,” Bloomberg quoted Ho as saying after the April 16 conference. He had added that another meeting would be held on May 18. The talks among the players spurred gains in SJM’s share price during the week, with the stock rising 13.3% to HK$2.22 between April 14 and 22. Still, SJM has yet to recover to its IPO price of HK$3.08 in July last year.
On the other hand, the stocks of five other casino concession or sub-concession players in Macau, namely LVS, MGM Mirage, Wynn Resorts, Galaxy Entertainment Group Ltd, and Melco Crown Entertainment Ltd, did not see much movement over that week. It seems that among the players in Macau, Ho’s SJM is the one that has made the most impact on investors. In terms of market share, SJM is the leader with a 30% share of Macau’s gaming revenue in February 2009, according to Citigroup. In second place is LVS with a 25% market share, followed by Wynn (16%), Galaxy (14%), Melco Crown (9%), and MGM Mirage (6%).
Not only does it have the largest piece of the pie in Macau, SJM also has a strong balance sheet (see table), with a net gearing of 4.9% or HK$365 million. It had HK$5.85 billion cash as at Dec 31, 2008.
This gives the company plenty of room to proceed with its plans to build several new casinos, the biggest of which will be the HK$6 billion Oceanus, near the Macau-Hongkong ferry terminal. Oceanus is scheduled for completion by year-end.
In comparison, interest in US-based casinos remains lacklustre. Apart from highly geared balance sheets (see table), their home market of Las Vegas, in the state of Nevada, is still slumping, dragging down their performance in Macau. According to the Nevada Gaming Control Board (NGCB), gambling revenue in the state fell 18.1% in February to US$830 million (HK$6.43 billion or $1.25 billion). This is lower than Macau’s average gambling revenue of HK$8.77 billion a month for the first quarter. The drop in revenues represents the 14th straight month in which Nevada’s gambling revenues have fallen, says the NGCB.
Reflecting their huge debts and the gloomy scenario in the US, the share prices of LVS, Wynn and MGM Mirage are still down between 15% and 61% year to date, in stark contrast to their peers from Macau, Malaysia and Singapore. Apart from SJM, two other Macau-based casino operators — Galaxy and Melco Crown — may be worth a closer look compared with their US-based peers. That’s because of their lean balance sheet and exposure to only the Macau gambling market, which may benefit somewhat from a spillover of China’s mammoth fiscal stimulus package of US$585 billion over the next two years.
Galaxy is controlled by Hong Kong tycoon Lui Che Woo, who made his fortune in building materials and construction materials. As for Melco Crown, it is controlled by Ho’s son, Lawrence, and James Packer, son of the late Australian tycoon Kerry Packer.
But the concern regarding Galaxy and Melco Crown is that their large new casino projects in the Cotai strip of Macau have yet to be proven. Galaxy’s mammoth Galaxy Mega Resort, which is still under construction, is expected to open by 2010. Meanwhile, Melco Crown’s City of Dreams project will open in 2Q2009. The two new casino developments are much bigger than what these operators now have in the Macau peninsula. Nevertheless, that has not stopped the stock prices of Galaxy and Melco Crown from gaining 51% and 32% respectively, year to date. Likewise, the share price of GIL has risen 34.4% year to date, even though its casino project in Singapore is not yet completed. Furthermore, Singapore is an untested market when it comes to casino gaming.
GIL is set to open its Resorts World at Sentosa casino project in Singapore next year. Compared with its peers in Macau, GIL is pitted against only one player — LVS. But since the Singapore casino market is one that would rely on foreign visitors, that means GIL will indirectly be competing against players in Macau as well as its parent Genting Bhd.
In Malaysia, Resorts World Bhd, the operator of the Genting Highlands casino and theme park, is in a comfortable position, with most of its patrons being locals. Its net cash holdings of close to RM4.5 billion ($1.9 billion)may lure investors who anticipate a big cash payout some years down the road. However, as competition heats up in the region for gambling revenue, Resorts lacks a growth story.
Most tend to believe that better odds still lie in Macau, due to its close proximity to China. While China curbed the movement of its citizens to Macau last year, investors are anticipating that the rules will be relaxed ahead of the 10th-year anniversary celebrations of Macau’s handover to China on Dec 20, 2009. This, if it materialises, will be another catalyst for Macau’s gaming industry.
Siow Chen Ming is a deputy editor with the Capital Markets and Companies desk at The Edge Malaysia.