Lights, Camera… Action!

Melco Crown Entertainment opened its $3.2 billion Studio City on Macau’s Cotai Strip last week to rave reviews. Though a government crackdown on corruption hasn’t helped the VIP segment, Lawrence Ho and James Packer (left with director Bret Ratner) are betting on the mass market by introducing a property built around entertainment.

Lights, Camera… Action!

Ho: VIP just 10 percent of Melco in Macau

The stars came out last week for the grand opening of Studio City, Melco Crown’s Hollywood-themed resort on Macau’s Cotai Strip. But red-carpet appearances by the likes of Leonardo DiCaprio, Robert DeNiro and Martin Scorsese may have been overshadowed by a much bigger story: the debut of a $3.2 billion casino resort during a 16-month drought in the territory’s gaming industry. The downward trend may not abate any time soon: gross gaming revenues for July to September was down 34.4 percent year-on-year, and October may be no better, according to forecasts.

“We picked the worst year in gaming to open,” Melco Crown Chief Executive Lawrence Ho joked to the Wall Street Journal. Even so, Ho and his partner in the venture, Australian casino magnate James Packer, say they are confident about prospects for the company’s new resort, despite a Chinese government crackdown on corruption that has put a dent in the VIP market. Ho believes Studio City, which opened October 27, will make it up with a high volume of mass-market players.

“What has been going on with the Chinese economy, especially the anti-graft campaign, has made the VIP environment more challenging in the near term, as fear has been driven into the hearts of many of the middle-to-upper class,” Ho told Fairfax Media. “However, the gaming market, especially the mass-market segment, still has much potential for development.”

To that end, Studio City offers plenty of mainstream entertainment that would likely hold little interest for high rollers, from a Batman flight simulator to Asia’s tallest Ferris wheel, according to the Sydney Morning Herald.

“Melco has tailored its investments and market strategy towards attracting a diverse clientele from both gaming and nongaming sectors,” said Ho. “Diversification and innovation are paramount to overcoming the challenges and ensuring sustainable success in the city.”

But the resort comes with built-in problems. For one, the local government granted Studio City just 200 tables along with some 1,200 poker machines; the resort may add 50 more gaming tables in January. But Melco Crown had expected at least 400, and so did lenders who put HK$10.85 billion ($1.4 billion) into the resort. If Studio City does not have 400 tables by this time next year, the banks could demand immediate repayment of outstanding notes.

“It’s no secret that for a long time the rumor was we were going to get 150 tables,” like Galaxy Entertainment did when it first opened its Phase II and Broadway resorts on Cotai, said Ho. “Were we flipping out? Of course we were flipping out. But we never went out publicly. There’s no arguing with City Hall. There’s no arguing with the government. There’s only begging and lobbying and more begging.”

To avoid a default, Bloomberg News reported that Packer and Ho have asked for “a so-called covenant holiday for 2016,” meaning they would not have to meet requirements set by the banks for the calendar year; the company also has asked for more relaxed financial conditions in 2017.

Meanwhile, brokerage Wells Fargo has called Studio City “a key catalyst” for the city’s overall gaming industry, according to GGRAsia. Analyst Cameron McKnight said, “The extent to which Studio City grows the market is likely to drive stocks.”

McKnight was impressed by Studio City, saying it has “considerable long-term appeal; our checks suggest the property is very impressive.” Needless to add, he acknowledged near-term concerns as the property opens in “a weak market.”

Some analysts are concerned about multiple lavish resorts coming online in a struggling environment. Nomura Securities gaming analyst Harry Curtis says the ratio of supply to demand for gaming in Macau is “way out of whack.” He believes the decline will continue through 2017, which could mean big trouble for Las Vegas Sands’ $2.7 billion Parisian Macao and the $4 billion Wynn Macau, both scheduled to open next year.

“Capacity is growing at just the wrong time, when the value per customer is shrinking significantly,” wrote Curtis.

Las Vegas Sands President and COO Rob Goldstein called Macau “a question mark for any operator,” but his boss, Sands chairman and CEO Sheldon Adelson, said though Macau is “challenging,” he remains “fully committed to playing the pioneering role in Macau’s transformation into Asia’s leading business and leisure tourism destination.”

“We have steadfast confidence in our future success,” Adelson said.

Unlike Steve Wynn, who recently called the government “preposterous” and “outrageous” for establishing a 3 percent cap on table growth in Macau, Adelson was more diplomatic. In a conference call, he said, “We have a belief our gaming license is a privilege and not a right. We have always been respectful of the Macau government’s desires. We were the pioneer of the integrated resort business model. That’s what the government wants. We will continue to do that.”

Notably, reported the Wall Street Journal, Studio City has bucked tradition by opening without a VIP room. Though analyst McKnight wrote that a “dominant grind mass focus could constrain initial results,” the key word may be “initial.” The government’s demand for a more diverse economy could pay off in the long run, Ho believes.

“Our company, our board of directors, James Packer and myself have confidence in the Macau market,” he told the Macau Daily Times in an interview. “We have done everything differently, every time the government asked for diversification we did not just take that and say, ‘I’m just going to give you some crappy lazy river and a swimming pool and say it is diversification.’ We also believe that what we do is at a point of differentiation because a casino is a homogeneous product, every casino is the same, what we are really trying to sell is the experience and the emotion.”

“We veered away from the VIP market a long time ago,” he said. “I think we are the second least reliant on VIP customers out of the six concessionaires. The VIP contribution to our overall group, even before Studio City, was less than 10 percent, so that is not that important to us at the moment. We all understand table caps and annual growth, so we understand why the government did that. Even if we had got the 400 tables, the percentage of VIP would be minimal so we are where we are and we are happy with it. Ultimately we have been the biggest supporter of the ‘mass business.’”