The Venetian Casino's Tricky Bet

Macao - The Venetian casino complex in Macao is plenty grand. Singing gondoliers ply their boats along a canal that meanders through a mall featuring luxury boutiques, an 1,800-seat theater for the Cirque du Soleil, and dozens of bars and restaurants.

Problem is, most of those attractions stand half empty even as the tables and slot machines are crowded with players drinking, smoking, and shoving chips across the felt. The owner of the casino, Las Vegas Sands Chairman Sheldon G. Adelson, has made the Venetian in Las Vegas a money machine by filling its hotel rooms with vacationers, conventioneers, and of course, gamblers. In Macao, it's mostly gamblers.

Adelson's inability so far to recreate all of his Las Vegas success has investors worried, especially since he's doubling down in Asia with a gambling palace in Singapore and even more casinos in Macao. Shares in Adelson's Sands China, a spin-off from his main company, fell sharply after its $2.5 billion initial public offering on Nov. 30 in Hong Kong. (As Bloomberg BusinessWeek went to press, the shares had recovered somewhat.) In contrast, many other Hong Kong IPOs have seen share prices soar.

Since Macao opened up its gambling market in 2002, Adelson and others have tried to turn the seedy former Portuguese colony into a Las Vegas clone with luxury hotels, wholesome entertainment, and modern convention halls. Yet nongambling revenues account for just 14% of Sands China's sales, about half of what they are back in Las Vegas. Macao's gamblers—mostly from China—would rather leave their families at home, depriving the mall and hotel of customers. And "[convention] facilities are years ahead of current demand," says Citigroup (C) gaming analyst George Choi. While gambling drove financial results for Sands China up overall this year, room revenues at the Venetian Macao fell 11.9% in the third quarter. Retail revenues plunged 23.8%.

For Adelson there's no turning back. In Macao, he will soon resume construction on casinos and hotels that were mothballed last year. A payoff on the $2.2 billion earmarked for these projects may take several years. He's also rushing to complete the $5.4 billion Marina Bay Sands Resort & Casino in Singapore by the first half of 2010.

Credit Suisse analyst Gabriel Chan sees considerable "execution risk," citing cost overruns, further delays, and a hotel glut as possible factors that could derail plans. He and other analysts worrry that Adelson's operations may be too levereaged. In a recent interview with Bloomberg News, Adelson said it's "completely wrong" to say Sands China may require more funds to realize these ambitions. Besides, he's confident he can raise more cash selling luxury condos next to his best hotel in Macao once financial markets pick up again. He also has the IPO money. "We'll have plenty of cash to cover any contingency," added Adelson.

The competition isn't letting up. Gamblers flocking to Macao can choose from six casino operators. The local rival is SJM Holdings, run by tycoon Stanley Ho, who enjoyed a four-decade monopoly before Macao liberalized gambling. Ho has clawed back market share this year with his new Grand Lisboa casino, which attracts more of the mass-market Chinese gamblers who shun the frills offered by the Venetian. Adelson is no quitter. But he has a fight on his hands.

With Chia-Peck Wong in Hong Kong

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