playing-the-odds-in-macau

Playing the odds in Macau

Galaxy Entertainment's CFO, Nigel Morrison, discusses the flagship StarWorld property and the company's strategy for capitalising on Macau's booming gaming market.
Nigel Morrison joined Galaxy Entertainment as chief financial officer earlier this year, attracted by the opportunity of a lifetime to be at the forefront of the industry, work with new technology, grow market share and build new businesses.

ôMacau is an incredible place to be. ThereÆs an explosion of gaming, of new technology and new properties. ItÆs a fascinating and challenging environment to be in for people in the gaming industry,ö he says.

Morrison spent 18 years in the casino business and was the first CFO of the Crown Casino complex in Melbourne and afterwards became COO. Prior to joining Galaxy, he was the CEO of the Federal Group û the largest private casino and gaming company in Australia.

GalaxyÆs flagship property, the StarWorld Hotel and Casino, opened in October 2006 on peninsula Macau and, on its own, has a market share of 12%. ôWe are very pleased with its progress as a casino. We think it has great potential. It has an excellent location and we are continuing to invest in it,ö says Morrison.

In addition the company owns CityClubs which operates four casinos on a joint-venture basis. Galaxy reported revenue of HK$6.3 billion ($810 million) for the six months ending June 30, of which StarWorld's VIP rooms accounted for HK$2.63 billion on bets of HK$92.5 billion.

The key to maintaining the profitability of a casino in Macau, Morrison says, is understanding the volatility inherent in baccarat, the most popular table game in Macau among both the high-rollers and the mass market. But it is particularly important to get it right in the VIP rooms where the big bets are made.

ôYou have to be able to work out that what is happening in the high-roller rooms is within the bounds of normality. ItÆs mostly statistics û understanding normal distribution and standard deviation,ö he says.

The theoretical house advantage for baccarat is just over 1.3%, which means that for every $100 bet, the house should make $1.30. But the problem is that you need to play a lot of hands before arriving at that point. ôAlong the way you can win or lose 10% which could translate into losses of hundreds of millions a year,ö Morrison says.

The outcome depends to a large extent on how the game is structured. Casinos have to decide on the maximum bet whether it be hundreds of thousands of dollars or even as high as one, two or three million dollars. This decision conditions how much business is done at a certain level. While there are always a lot of players willing to play at a lower level there are only a few that play at the level of the maximum bet. But it is a fine call because if the maximum bet is too low the casino can lose the client. But if the maximum bet is set too high and there isnÆt enough volume, this can expose the casino to the risk of high losses.

ôYou really need to understand what your maximum bet is, and the implications of that for your cashflow in the business. So you need to have enough cash to protect yourself if you do have a losing streak.ö

The maximum bet at Galaxy, and generally in the high-roller private rooms in Macau, is around HK$1.5 million which can produce some sizable wins.
In Macau baccarat is played by 99% of the high-rollers and 80% of the mass market. In the US, Europe and Australia, blackjack and roulette are the most popular games, though baccarat is gaining in its appeal, largely as a result of Asian demand. Of the three main games it gives the best odds to the gamblers. Blackjack has a house advantage of 1.5-1.8%, while roulette does even better for the house with an advantage of 2.5-2.7%.

Galaxy has a two-pronged strategy for Macau and it is based on the view that there will be two markets. The first, based on peninsula Macau, will comprise the serious gamblers that come from mainland China.

ôThey are not there to drink fine wine and stay in expensive hotel suites. They are really there to gamble and are serious about winning, and thatÆs a slightly different psyche from the style of gambler you might see in the US or Australia,ö says Morrison.

He reckons that StarWorld which is adjacent to Wynn Macau, MGM, and Grand Lisboa û which are all within walking distance of each other û will form a core destination on peninsula Macau û rather like the Las Vegas strip.

The second market will be based on the Cotai strip, a massive five square kilometre area of reclaimed land between the islands of Taipa and Coloane. It will be a different market, aimed at convention and exhibition delegates, and those looking for upmarket shopping and entertainment.

ôWe think it is going to take some time for that market to fully develop. Our view is that it is probably a couple of years away.ö

Galaxy is developing it in two phases. Its flagship, Galaxy World Resorts, a 2,500-room mega-resort is expected to be completed next year. The development of the Cotai market got underway with the opening of The Venetian at the end of August. It will be watched carefully by other casino operators investing there. Galaxy recently received Macau government approval to expand its development on the Cotai strip. It now aims to build an additional nine hotels, 380,000 square feet of gaming space, 750,000 square feet of convention space and 1.4 million square feet of retail and restaurant space though has not said when it will start work.

For the moment Macau is on a roll. Gross gaming revenue (GGR) increased from $2.3 billion in 2001 to $6.9 billion in 2006 an increase of 44% and exceeded the gambling revenue from the Las Vegas strip, previously the worldÆs highest. During the same period visitors have doubled rising from 11.5 million to 22.7 million in 2006. GGR per table is also higher in Macau than in the US. In the fourth quarter of last year, GGR per table in Macau was 132% and 282% higher than for the Las Vegas strip and Atlantic City respectively.

While Morrison is confident about the companyÆs potential in Macau, he recognises the challenges.

ôThere is tremendous competition so you always have to be looking at your market share, and at your standards of service. You need to ensure that your customers have a good experience, and feel that they are getting good value for money, so that they keep coming back.ö

This story first appeared as part of a larger feature in FinanceAsiaÆs September issue.
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