Gambling firms bet on China

VISITORS to the Venetian Resort Hotel Casino in Las Vegas this past week were greeted by a prophetic sight: a massive banner with Chinese characters wrapped around the faux bell tower of the structure, which is built to look like the Doges Palace in Venice. 'By the end of the decade, Macau could well surpass Las Vegas as the world's largest gambling market. JP Morgan projected that Macau would generate more than $10 billion in annual gambling revenue within the next four years.' The banner, put up in honour of the Chinese New Year, is emblematic of far more than the annual celebration. It is an overt cross-marketing gesture by the Venetian's management Las Vegas Sands designed to reach out to the global gambling industry's fastest-growing customer segment: Chinese gamblers. The China Center for Lottery Studies at Beijing University estimates that about 600 billion yuan (S$118.8 billion) in gambling money flows out of the country every year. The Chinese government, looking to retain as much of that money as it can, deregulated its gambling industry in 2001. The move opened the gates to foreign operators, including Sands, that have pined for the opportunity to set up shop in Macau, a gambling enclave that for 40 years was controlled by a single casino operator, Stanley Ho. 'As soon as we heard licences would be available in early 2000, we got on a plane and started begging,' said William Weidner, the president and chief operating officer of Sands. His company, along with Steve Wynn's Wynn Resorts and MGM Mirage, was among the few operators to win a licence. In 2004, Macau, China's only legal gambling hub, represented the second-largest gambling market in the world, generating about US$5 billion in revenue with the daily win per table averaging more than US$15,000, according to a report by JP Morgan. Those figures, the report said, 'put it on par with Las Vegas and ahead of Atlantic City', heretofore the world's two largest gambling markets. Las Vegas casinos generated gambling revenues of US$5.3 billion in 2004, with an average win per table per day of US$2,500 to US$2,700. By the end of the decade, Macau could well surpass Las Vegas as the world's largest gambling market. JP Morgan projected that Macau would generate more than US$10 billion in annual gambling revenue within the next four years, 'roughly the equivalent' to Atlantic City and the Las Vegas Strip combined. The projection is based on expectations that Beijing will continue to relax travel restrictions from mainland China as well as allow for Las Vegas-style megaresort developments that will increase the number of rooms far beyond its current level of about 6,000. For Sands, the first major foreign operator to open its casino doors in Macau, the move overseas has proved fortuitous. According to Mr Weidner, the Sands Macau, which opened in May and cost US$265 million, will have paid for itself within its first year of operation. That kind of rapid return on investment is 'almost unheard of', even in the cash-rich world of gambling, said Sanjay Ayer, a gambling analyst for Morningstar, the Chicago-based equity researchers. And this month, the Sands Venetian in Las Vegas will open two private gambling salons targeted at Asian high rollers - gamblers willing to spend upward of US$500,000. The salons, the company said, will be promoted actively to customers visiting the Sands Macau. Courting Asian customers is the latest in a series of astute moves that has kept casinos humming, especially as the global economy has picked up and consumers are spending more freely. Customer traffic to Las Vegas - particularly for conventions - surged last year, with more than 38 million people visiting the desert city. Andrew Zarnet, a casino industry bond analyst for Deutsche Bank in New York, estimated that it cost at least US$1 billion to build a new hotel or casino in Las Vegas and nearly that much to redevelop one. The major operators, mindful of oversupply and eager to grow without diluting the market, have turned to growth by acquisition. Harrah's Entertainment agreed in July to buy Caesars Entertainment for US$5 billion, and MGM Mirage is expected to complete its US$4.8 billion purchase of Mandalay Resort Group this quarter. There are an estimated 4,000 or more gambling operations around the world. That number is likely to grow. Ken Adams, a gambling consultant based in Las Vegas, said that Britain, Singapore, Japan, South Korea, Thailand, India and Malaysia were reviewing their gambling laws with an eye to further deregulation - and more gambling revenue to tax, at rates that Mr Adams said could range from 5 per cent to 70 per cent. Both MGM Mirage and Harrah's Entertainment have submitted plans to build in Singapore. Meanwhile, the British Parliament is reviewing a package of 176 measures that would further deregulate the country's gambling industry to make it more open to foreign investment. Goldman Sachs estimates that the changes, if enacted, will bring nearly US$11 billion in new investment in the British casino sector in the ensuing five years. MGM Mirage, Harrah's and Sands, as well as the South African leisure group Sun City, are all developing plans for resort-type casinos in Blackpool, Newcastle, Manchester and Sheffield. But it is on Macau, with its proximity to China - and, more to the point, to 1.2 billion Chinese - that the highest hopes for significant returns rest. The intent is to turn Macau and its nearby sister islands of Lantau, Taipa and Coloane into a regional casino-resort hub oriented toward business as well as leisure travellers. Macau had 16 million visitors last year, most of whom came from mainland China. Both Sands and Wynn Resorts are planning to build large-scale casino-hotels in the market within the next two years. On the flip side, negative developments add to the appeal of Internet gambling, an emerging market that analysts agree will cannibalise at least a portion of casino operators' gambling profits. The Las Vegas-based Gaming & Entertainment Group, a publicly traded developer of computer networks that counts Internet casinos among its clients, estimated that by the end of 2004, about 15 million people worldwide would be actively gambling online, generating more than US$8 billion in revenue. The other major risk, which US operators acknowledge in their regulatory filings, is the threat of higher interest rates, which raise the cost of borrowing money to build facilities. 'If we just look at the book value of major US operators between 1993 and 2003, their capital investment rose from US$9.9 billion to US$37 billion over a 10-year period,' said Jeremy Aguero, principal analyst for Applied Analysis, a financial and economic research firm based in Las Vegas. If the US Federal Reserve continues to raise interest rates this year, as it is expected to do, the most highly leveraged companies will feel the pain most acutely. - IHT