City of Dreams: Macao's $2.1 Billion Gamble

Fireworks explode over businessman James Packer and CEO of Melco Entertainment Lawrence Ho's 'City of Dreams' casino on June 1, 2009 in Cotai, Macau, China. Victor Fraile/Getty Images

Just hours before the official opening on June 1 of Macao's latest and slickest casino, the $2.1 billion City of Dreams, Melco Crown Entertainment (MPEL) co-chairmen Lawrence Ho and James Packer took turns at being rock stars, smashing electric guitars at a photo opportunity at the resort's Hard Rock Hotel. The two didn't explain the symbolism, leaving it to reporters to wonder whether they mean to pulverize their competition, which includes Las Vegas Sands (LVS), MGM Mirage (MGM), Wynn Resorts (WYNN) and SJM (controlled by Ho's father, Stanley). Then again, Packer, too, is the son of a tycoon, the late billionaire Kerry Packer. So the guitar smashing could perhaps represent a break with the past in an industry controlled by the previous generation.

The City of Dreams—smack across the street from the kitschy reproduction of the Doges Palace of Venice at the Las Vegas Sands' Venetian Macao—is the second casino to open on the Cotai strip, a piece of reclaimed land about five miles from downtown Macao. Ho calls the project "crucial" to ensuring the success of the strip, saying his edgy casino will cater to a segment of the market that has been underserved by the heavily themed Venetian property. "If you are a younger, hipper, cooler crowd and you like to party or you like music, then the Hard Rock is our solution," he says.

But 31-year-old Ho isn't just catering to his own cohort. The Crown Towers, a second hotel in the City of Dreams complex, is designed to cater to VIP gamblers while the leisure guests will find appeal at the Grand Hyatt Macau, due to open later this year. All three properties, combined with a 2,000-seat, purpose-built theater, will "take Macao as an integrated resort to the very next level," he said.

Challenging Cotai Strip Location

City of Dreams faces tough odds. Macao gaming revenues have been hit hard by the global economic crisis and tighter travel restrictions on Chinese visitors implemented last year. In the first quarter, gaming revenues fell 13%, and revenues for the year are expected to fall 8%. Even as City of Dreams opened its doors, cranes were idled over the Las Vegas Sands Sheraton, Shangri-La, and St. Regis hotels. Work on a nearby casino by Hong Kong-based Galaxy Entertainment has also been stalled by the downturn.

Melco's complex also suffers from a challenging location. More than 75% of Macao's $13.7 billion in gaming revenues last year were generated from casinos in downtown Macao, a tiny peninsula attached to mainland China, rather than Cotai. While CLSA analyst Aaron Fischer says the City of Dreams launch will be a "tipping point" in the development of Cotai, he writes, "We would be happier if City of Dreams was opening on the Peninsula."

The government's desire to transform Macao from a seedy enclave into a multipurpose resort was the motivation for creating the Cotai strip and ending the four-decade-long monopoly enjoyed by Stanley Ho in 2002. The idea was to bring foreign operators with their resort hotels, conventions, golf, and family-friendly shows—all wrapped around a core of lucrative green-felt tables and blinking slot machines. However, that model has so far been less successful than envisioned in Macao, the only part of China where gambling is legal. The bulk of the roughly 23 million visitors per year are day-trippers, arriving either by ferry from Hong Kong or by walking across the border gate with China. The average stay per guest is less than one and a half days, and a good chunk of hotel rooms are given gratis to VIP players. Unlike in Las Vegas, where hotels provide a huge source of revenues to operators, in Macao they rarely turn a profit.

Strong Balance Sheet

Mainland Chinese, who account for more than 50% of arrivals to Macao, haven't shown much inclination to visit anything more than the baccarat tables. (One exception: massage parlors, for which Macao has long been infamous.) "Customers just want to go to the tables rather than enjoy a show or fine dining or shopping," SJM's Chief Executive Ambrose So said last month. "You cannot simply clone the Las Vegas model."

Still, Ho is upbeat about his project. Unlike its heavily leveraged U.S. counterparts, Melco has plenty of cash, having listed its shares on Nasdaq in 2006 when the market was booming. "We have managed our balance sheet very carefully, so instead of having debt-to-equity ratios of 5 to 1, ours is more like 1 to 1," says Ho. The stock price is down 43% over the past 12 months, compared with a drop of 90% for Las Vegas Sands and 62% for Wynn. The company lost $2.4 million on sales of $1.4 billion last year, and CLSA expects it to lose $152 million on sales of $1.47 billion in 2009 because of startup costs for the new casino.

Equally important to healthy books is a clean bill of health from gaming regulators, as MGM Mirage discovered on May 18 when the New Jersey Casino Control Commission recommended it disassociate itself from Lawrence's older sister Pansy Ho, whom, without providing specifics, it deemed to be "an unsuitable partner." Both MGM and Pansy Ho, which have a 50-50 joint-venture casino called the MGM Grand Macau, say they are studying the recommendation.

For his part, Lawrence Ho says he has gone to great lengths to ensure regulators that he is squeaky clean. He says he, Melco International, and Melco Crown Entertainment have "gone through all the related jurisdictional authorities." Says Ho: "We feel very, very confident that in terms of prevention of money laundering practices and all, the necessary guidelines and due diligence have been performed."

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