SJM bet is a sign of the times in Macau

The Wynn Macau has a mechanical dragon, the Galaxy Macau has a huge wave pool, and the Venetian Macau has, well, Venice.

The next wave of casinos in Asia's gambling capital will even have a replica of the Eiffel Tower while the ultra-luxury Louis XIII hotel will have a giant diamond encrusted in the roof.

 

But for now, SJM, Macau's only home-grown casino group – founded by tycoon Stanley Ho – has to make do with golden shovels.

 

Thursday saw the groundbreaking ceremony for the company’s first casino resort on the Cotai Strip – Lisboa Palace – which is due to open in 2017.

 

SJM said it will cost HK$30 billion to build but that it has about HK$20 billion in cash and operating cashflow of HK$7 billion to HK$8 billion, making a fund-raising trip to capital markets unnecessary.

 

In case there was ever any doubt, Ambrose So, chief executive of SJM, moved to reassure the reporters gathered that it was not to be confused with the Wynn Palace being built next door. “Wynn is Wynn, this is Lisboa, so there will be no confusion. If you tell the taxi driver you want to go to Lisboa Palace they wont take you to Wynn Palace, and vice-versa,” he said.

 

The comment was timely because the six gaming groups that dominate Macau face a growing battle for customers; a demographic that up until recently seemed simple, in that they were just gamblers.

 

Now, however, the government of Macau is pushing hard to reduce the economy’s reliance on gambling and gaming.

 

“The government has indicated table allocation will depend on non-gaming offerings but no clear metric has been provided,” analysts at Nomura said in a recent report.

 

Macau's six principal casino groups – Wynn Macau, Galaxy Entertainment, MGM China, Sands China, SJM and Melco – have introduced, to varying degrees, alternative streams of revenue, such as high-end restaurants and luxury goods shops. Some have even re-configured their casino complexes as leisure destinations, such as the Galaxy Macau, which contains a cinema and a large swimming pool.

 

The stakes in this push for greater diversification are huge because the rewards from operating in Macau have to date been so high. It is widely known that Macau’s gaming revenues outstrip those of Las Vegas by a factor of six.

 

But how far can growth continue? Macau’s gaming sector revenue grew 7% in January to US$3.6 million but the year-on-year growth was the lowest in 14 months and missed analysts’ expectations of 11%-15% growth.

 

The gaming revenue growth seen in January was the slowest for 14 months.

 

Visitor boom

One thing is clear: people are still flooding into Macau. Visitors totaled 22,907,724 in 2008 and are expected to hit 31,267,986 this year, according to the Nomura report. 

Compounding this will be the opening in 2016 of a bridge linking Hong Kong with Macau, which will make life easier for those put off by the ferry ride; currently the only method of travelling between the two cities – helicopters aside.

So the message that is emerging is that the gaming groups need to spread their wings to better take advantage of visitor numbers and ride out any potential drop-off of gamblers; which are just as susceptible to a downturn as banks and the high street.

And here SJM has work to do as it is still heavily reliant on gamblers. In 2013 it had the biggest market share in terms of the number of gaming tables (30.9%), Nomura said, but non-gaming Ebitda for 2013 was an estimated US$30.1 million, the lowest of the six operators.

In comparison, Sands China made US$617 million from non-gaming Ebitda in 2013; Wynn Macau US$194.1 million; Galaxy US$74.4 million; Melco US$69.1 million; and MGM China US$31.4 million.

As a result, Macau's diversification drive is perhaps more stark for SJM than for the five others, which from outward appearances seem to have a head start. Not so, said So.

“We don’t think we are late … we are just in time to catch the traffic,” he said. “Over 90% of the total area of the project will be devoted to non-gaming activities.”

The Lisboa Palace will of course boast gaming facilities: 700 gaming tables and more than 1,200 slot machines. In context, the Grand Lisboa, also operated by SJM, has more than 230 gaming tables.

But the complex will also have luxury restaurants and shopping, an entire tower designed by Versace, ornate gardens, a theatre and a huge “wedding pavilion” – presumably in an effort to defeat Vegas in shotgun weddings as well as gaming revenues.

This may all sound familiar but So thought otherwise: “We are not copying others. This is very original and authentic. The Eiffel Tower is a very strong icon but why can you not go to Paris and look at the authentic one? Why do you need to have a replica here? Why do you go to a museum? Because you want to see the originals; you don’t want to see replicas.”

It may also sound strange in a city that has effectively copied and mastered the Las Vegas model – why go to Vegas when you can go to Macau?

It is also a brave CEO that lambasts rivals’ imitations at the groundbreaking ceremony of a casino complex that effectively borrows ideas, designs and architecture from Europe and elsewhere.

But these are the risks that go with such huge stakes. And SJM is not alone as we head towards another phase in the development of the Macau juggernaut.

If the bet goes awry all six operators, not just SJM, may need more than golden shovels to dig themselves out.