Sheldon Adelson is adding a fourth casino in Macau, the world’s largest gambling hub, drawing almost six times the revenue of the Las Vegas Strip. The billionaire’s rivals are cheering him on.
Sands China Ltd., the Asian arm of Adelson’s Las Vegas company, next month will open the Cotai Central resort with a 300,000-square-foot casino, almost 6,000 hotel rooms and cascading waterfalls tailored for the 16 million mainland Chinese tourists who visited Macau last year.
Competitors see the additional rooms and novelty of a fresh resort drawing more Chinese to gamble on the island, where gaming revenue is estimated by CLSA Ltd. to top $100 billion by 2020 and where hotels are near capacity. Success for Sands would expand the industry in Macau, the only place in China where casinos are legal and where Melco Crown Entertainment Ltd., Wynn Macau Ltd., Galaxy Entertainment Group Ltd., MGM China Holdings Ltd., SJM Holdings Ltd. and Sands China get almost all their revenue.
“We welcome the competition and we think this will bring more traffic to Macau and helps grow the market and drive our business,” said Francis Lui, deputy chairman of Galaxy Entertainment Group.
At the heart of the gaming companies’ push is a tiny swath of reclaimed land called the Cotai Strip, the Asian equivalent of the Las Vegas Strip, where local and global casino operators are spending billions on resorts that combine shopping centers, entertainment shows and hotel rooms to draw middle-class Chinese visitors. In doing so, they are recreating a center that historically catered mainly to professional gamers making bets on crowded, smoky floors.
Deutsche Bank AG estimates gambling revenue in Macau, a former Portuguese colony on the South China coast that’s less than half the size of Manhattan, will rise 25 percent this year, driven by more tourist arrivals. Adelson’s newest resort may propel a big part of that growth.
Macau, which had $34 billion in gambling revenue last year, has 20,000 hotel rooms, a fraction of the almost 150,000 that Vegas has, researcher CLSA estimated in a September report titled “Raining Cash.” The Las Vegas Strip had revenue of $6.07 billion in 2011, according to Nevada’s Gaming Control Board.
“We think the market is grossly underpenetrated,” said Robert Drake, chief financial officer at casino operator Galaxy Entertainment. “We do six times as much revenue as Las Vegas, but they have six times as many hotel rooms.”
Adelson’s Winning Hand
Adelson’s casino operator may win the most market share in Macau in 2012 because of the new resort, expanding 9 percentage points to 24 percent in the fourth quarter from a year earlier, said Karen Tang, an analyst at Deutsche Bank.
That would also solidify Sands’s position on the increasingly popular Cotai Strip, where it already has the island’s largest resort, the Venetian Macau that boasts singing gondoliers, a grand canal and an artificial blue sky.
Sands China, which is a unit of Las Vegas Sands Corp. where Adelson is chairman, reported a 44 percent jump in profit in the fourth quarter. The latest success and new project is a reversal from 2008, when Sands stopped construction in Cotai as credit markets froze and revenue growth slowed.
The 78-year-old Adelson, who made his money in the casino business, ranked 11th on the Bloomberg billionaires list with an estimated net worth of $26.8 billion as of March 27.
The new resort gives the American billionaire a chance to lure more customers from SJM Holdings, the Hong Kong-listed casino operator that has dominated Macau for four decades. Deutsche Bank’s Tang sees market share for SJM, founded by Hong Kong billionaire Stanley Ho, falling from 31 percent in the second quarter of 2011 to 25 percent in the fourth quarter this year.
Sands Cotai Central, which opens April 11, will have about 5,800 hotel rooms when completed in 2013 under the brands Conrad, Sheraton and Holiday Inn. In April, the resort will offer 1,800 rooms.
More hotel rooms translate into longer stays and ultimately higher gambling revenue on the island, CLSA wrote. When Macau added hotel rooms between 2005 and 2010, the average length of a tourist’s stay increased to 1.5 nights from 1.2 nights, the analysts found.
“It’s a market that has been driven, since its inception, by capacity,” said Edward Tracy, chief executive officer of Sands China. “The addition of hotel rooms, casino capacity and retail and entertainment is going to drive significant growth.”
Galaxy executives say they had a spillover effect on the industry when they opened the doors of a Macau resort in May. “When we launched Galaxy Resorts last year, we did grow the market,” said Deputy Chairman Lui.
Richer Chinese Visitors
Investors betting that new casinos and more visitors will increase gambling revenue have pushed up shares of Sands China 38 percent this year and Galaxy Entertainment 51 percent. MGM China Holdings, a unit of MGM Resorts International, has jumped 42 percent. Wynn Macau, a unit of Stephen Wynn’s Wynn Resorts Ltd., has added 19 percent and Melco Crown, the venture between Australian billionaire James Packer and Stanley Ho’s son Lawrence, has climbed 47 percent on the Hong Kong Stock Exchange. The benchmark Hang Seng Index is up 12 percent.
They have been aided by increasingly affluent Chinese, who have more money to bet as incomes have risen. Urban disposable income in China rose 14 percent to 21,810 yuan ($3,460) last year.
To draw the growing number of middle-class tourists, the casinos are adding long stretches of retail stores and entertainment shows like Melco Crown’s House of Dancing Water, a love story set in China that is enacted on a stage filled with water and includes stunts on bikes.
For Li Chun, a 44-year-old businessman from Tianjin in China, the side attractions are a bonanza. “You are able to put your wife and kids in a shopping mall while you can just concentrate on the gambling table,” Li said while visiting Macau. He planned to gamble as much as 200,000 yuan at the Venetian Macau.
Macau gets roughly 70 percent of gambling revenue from VIP, or high-stakes gamblers, according to Aaron Fischer, CLSA’s head of Asian consumer and gaming research in Hong Kong. The “mass market” - usually the term for middle-class visitors - is still the most profitable because casino operators pay commissions to professionals bringing in high-stakes gamblers.
As Macau casino operators push for growth, they face some restrictions from local government policies, Fischer said.
The Macau government has limited the number of gaming tables and hands out land permits at intervals to prevent the industry from growing too fast.
Wynn Macau, MGM China and SJM are awaiting approval of land leases for construction on the Cotai strip even as Melco Crown, which already operates the City of Dreams casino on Cotai, waits for permission to begin the $1.9 billion Studio City resort.
Even Sands could face hurdles if investors are disappointed in the early performance of its new casino or if it experiences any delays in expanding the resort, said Deutsche Bank’s Tang.
Sands also faces added risks if there are “unfavorable outcomes” from a U.S. regulatory investigation related to its Macau operations, she said.
Las Vegas Sands last year said it received a subpoena from the U.S. Securities and Exchange Commission to produce documents relating to its Macau operations’ compliance with the Foreign Corrupt Practices Act.
The casino operator said it believed the subpoena “emanated from allegations” in a lawsuit by former Sands China Chief Executive, Steven Jacobs, who has alleged, among other things, that Las Vegas Sands demanded that he use improper “leverage” to win government concessions. Sands China spokeswoman Mabel Wu declined to comment on the lawsuit. The company “intends to defend this matter vigorously,” Las Vegas Sands said while discussing the suit in a U.S. regulatory filing.
For now, the limits on expanding in Macau have some advantages for investors because casino operators can’t go on a spending binge, said CLSA’s Fischer.
“They can’t keep building and wasting money,” he said. That has prompted Sands China and SJM to pay dividends, saying they have enough cash to keep expanding.
The dividends are partly a bet that Macau’s gambling revenue will keep increasing. Fischer sees gaming in Macau benefiting from its local monopoly.
“Macau has no competition,” said Fischer.