HONG KONG - The two biggest United States investors in Macau are considering
cashing some of their holdings. Wynn Resorts and Las Vegas Sands (LVS), owner
of the Venetian Macao, are planning to sell stock in their Macau properties on
the Hong Kong stock exchange, probably this year.
Wynn chairman Steve Wynn and LVS chairman Sheldon Adelson are blood rivals, but
they apparently agree that it's the right time to sell stakes in their Macau
properties through initial public offerings (IPOs). The two companies have
different reasons for their move, according to observers. IPO plans are still
tentative, so no details such as the size and pricing of any offering are
available. They're not selling the stakes in their companies, but their
interests in Macau, the former Portuguese colony in the Pearl River delta, 60
kilometers from Hong Kong, where some
shine has worn off the boom that made it the world's biggest gambling market.
"The casino industry worldwide, and particularly in Macau, has suffered from
over expansion and over leverage," says Aaron Brown, author of The Poker Face of
Wall Street. "I think investors are attracted by the great potential
rather than the current prospects. While there has been small good news, hope
has jumped way ahead of news. Still, hope is good."
Separating the assets from each other will allow easier assessment of
performance "because Macau and Las Vegas are two markets with differing
fundamentals", Globalysis partner Jonathan Galaviz says. "There is no question
that Asia will provide the stronger relative growth proposition for the
industry on a global basis over the next decade."
At least one Macau rival hopes to share the reflected spotlight of any American
IPO. Robert Drake, chief financial officer of Hong Kong-based Galaxy
Entertainment Group, owner of the StarWorld Casino Hotel near Wynn Macau and
developer of Galaxy Resort next to LVS's Venetian Macao, says, "Galaxy welcomes
global gaming companies to list on the Hong Kong stock exchange. This
reinforces that Macau is now the gaming capital of the world.
"With more gaming companies trading on the Hong Kong stock exchange, greater
profile will be awarded to the local, Asia-based operators."
Selling low
IPOs in the gaming sector "would be well received by investors as gaming in
Asia is one of the best growth sectors globally, especially in terms of
earnings", says CLSA analyst Aaron Fischer, author of a recent bullish report
on Macau's gaming sector.
Macau casinos' year-on-year gaming revenue fell more than 12% in each of the
first two quarters of 2009, including a 17% drop in June, despite the opening
of the US$2.1 billion City of Dreams resort. Previous property openings had
boosted revenues significantly, but unofficial figures for July show gaming
revenue rose only 3%.
Wynn and LVS are considering selling shares despite - or because - business in
both Las Vegas and Macau has slumped. For Vegas, tough times began with the
spike in oil prices in early 2008, which cut automobile traffic, raised
airfares and eventually cut flight schedules. As the recession bit harder in
the US, Vegas' woes deepened.
Macau's troubles preceded the recession. From June last year, the Chinese
government tightened restrictions on mainland visitors, who represent 55% of
overall visitors and at least as much of the VIP baccarat market, which
accounts for 65% of total gaming revenue. Visits have been reduced from two
trips a month to once every three months. Loopholes allowing Macau visits via
Hong Kong and en route overseas were also tightened.
For the second quarter, Wynn's overall corporate profits fell 91% from a year
ago. The news in Macau wasn't as bad, with operating income off 28% for the
quarter and 29% for the first half. In an earnings call with analysts on July
30, Steve Wynn wouldn't comment on the potential Hong Kong IPO except to
confirm the company had filed papers to start the process.
Back from the brink
LVS, on the brink of bankruptcy late last year, reported its quarterly loss
increased nearly 25 times to $222.2 million. Its three Macau properties
(Venetian Macao, Sands Macao and Four Seasons Macao) reported operating income
of $93.1 million for the quarter, down 25% from a year earlier, and $187.4
million for the first half, down 19% from the year-ago period, before the money
bleeding Four Seasons opened.
Since its brush with bankruptcy, LVS has suspended further work on its other
properties in Cotai, the landfill connecting Macau's outer islands of Coloanne
and Taipa, where it planned to spend $12 billion to recreate the Las Vegas
Strip with Venetian Macao as its flagship.
Questions remain whether the mega-resort model, particularly as executed by
LVS, can succeed.
"The American business model of expensive hotel rooms and fine Western dining
to attract people is simply the wrong one for Asia," says Laurence Lipsher,
Guangzhou-based certified public accountant and author of The Tax Analects of Li
Fei Lao. "Frankly, I do not think that there will be much gambling on
the Wynn or Sands IPOs by the Hong Kong investment community."
An industry executive speaking on background suggested that most interest will
come from US investors and funds looking for a pure play in Macau.
One key question for potential investors concerns the reason for any share
sale.
"If you're a glass-half-empty kind of guy, you note that while investors want
to buy the stock, the companies who have more information want to sell it,"
says Brown, a US-based risk analyst as well as a poker enthusiast. "The
question is are they selling due to great opportunities, because they need cash
or because they think the stock is overpriced?
"With Wynn, I think the good news dominates. Investors want the stock, and he
has good things to do with the money. I consider LVS more mixed news."
Play it again, Steve
For Wynn Macau investors, that good news would include its Encore property
adjacent to Wynn Macau, scheduled to open next year. For the overall company,
added liquidity could pave the way to buying Las Vegas properties at bargain
prices. The Bellagio, which Steve Wynn built while running Mirage Resorts
before MGM Grand's takeover in 2000 forced him out, is one rumored target.
In the LVS earnings call, chairman and chief executive officer Adelson told
analysts the company is "continuing to advance five or six different options to
increase our liquidity". In response to a question, Adelson said, "I know there
has been a lot of publicity about since Wynn filed its IPO in Hong Kong. It has
been almost a given that we're going to follow on. So I would just like to
caution that that final decision is not yet made."
Whichever direction it takes, LVS needs the money desperately. As Adelson
reminded callers, LVS's business model is predicated on building then selling
non-core assets such as shopping centers and condominiums adjacent to its core
assets hotels and casinos to reduce its debt. The recession and credit crunch
has made it impossible to sell those non-core assets at what Adelson called
"exaggerated" prices.
That leaves LVS up against the limits of its debt covenants as it works to
complete the $5 billion-plus Marina Bay Sands in Singapore, the most expensive
casino resort ever built. An industry insider says that while LVS has its
Singapore financing in place, it can't draw down those funds without improving
liquidity. The IPO appears to be the most feasible option for LVS. Adelson also
hopes improved liquidity will enable the company to restart its mothballed
projects in Cotai for those IPO investors.
"We are very bullish on Macau's prospects over the coming months," CLSA's
Fischer says. In his report released in May, Fischer cites eight reasons for
optimism about Macau, including lower revenue in late 2008 making it easy to
register year-on-year growth now, speculation on possible reductions in the
gaming tax and easing of visa restrictions, and cost cutting (mainly in the
form of layoffs) by operators. Fischer may prove right, but investors may be
reluctant to bet on it.
Macau Business special correspondent and former broadcast news producer Muhammad
Cohen told America’s story to the world as a US diplomat and is author
of
Hong Kong On Air,
a novel set during the 1997 handover about television news, love, betrayal,
financial crisis, and cheap lingerie. Follow
Muhammad Cohen’s blog for more on the media and Asia, his adopted home.
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