Adelson's $3 Billion Macau Push Despite Slowdown

Published: Thursday, 20 Sep 2012

 

By: Rajeshni Naidu-Ghelani
Assistant Producer, CNBC

 

A slowdown in China and declining profits isn't stopping Sands China, the Macau casino unit owned by U.S. billionaire Sheldon Adelson, from expanding its footprint in the world's largest gaming market with a new $2.5 to $3 billion casino project.

Sandscotaicentral.com Sands Cotai Central

Adelson was in Macau on Thursday for the opening of the second phase of his Sands Cotai Central resort, according to media reports, where plans for another Paris-style mega casino complete with a replica of the Eiffel Tower were unveiled.

 

The expansion comes at a time when there have been signs of weakness in Macau's gaming market, but analysts told CNBC the size of the market is still significant enough to justify such a project.

 

"We think this expansion will further cement Sands China as the dominant mass market operator in Macau," Grant Govertsen, managing partner and lead analyst of Union Gaming Research said. He estimates that gaming revenues in Macau will hit $38 billion this year.

 

Sands China [1928.HK 28.40 -0.25 (-0.87%) ] , a subsidiary of U.S. gaming giant Las Vegas Sands [LVS 44.92 -0.93 (-2.03%) ] headed by Adelson, already operates four resorts in Macau. The latest being the second phase of its Sands Cotai Central resort, which boasts of having the largest hotel in the territory. Its new casino is expected to start construction in November, according to Reuters.

Sands China is clearly placing a long-term bet on Macau and tourism in Asia with plans for this new resort, according to Jonathan Galaviz, managing director and chief economist of Galaviz & Company.

 

"As long as the macroeconomic condition of Asia remains stable, tourism in the region should continue to grow," Galaviz said. "Ultimately, Macau is a tourism play and integrated casino entertainment is one of many important offerings in the tourism sector."

 

Plans for the new casino come despite several agencies like Fitch Ratings downgrading its 2012 gaming revenue forecast for Macau to 10-12 percent in July from an earlier estimate of 15 percent due to the impact of a slowdown in China. In comparison, Macau gaming revenues grew 42 percent in 2011 and a whopping 58 percent in 2010, according to Fitch.

 

Despite recent softness in the VIP or high roller segment, which accounts for 70 percent of Macau's revenue, Govertsen said the mass market has been growing at 30 percent year on year for the past 11 quarters. He expects demand to continue to grow driven by improved access to Macau from mainland China.

 

"Several new or expanded infrastructure projects should have a significant positive impact on Macau

beginning early next year," said Govertsen.

 

A direct rail line from Guangzhou to Macau, the opening of a new theme park in Zhuhai and doubling of the border gate capacity between Macau-China could bring in an additional couple of million visitors per year, according to Govertsen.

 

It takes about three years to build a casino resort and while it's difficult to say what the market will be like when the casino opens, Govertsen thinks Sands China will be able to capitalize on mass market demand as it is already one of the most recognized operators in Macau with four casinos. The new Paris-style casino will be its fifth.

"They will control an outsized share of hotel rooms, table games, slot machines and electronic table games, which means they should capture an outsized share of market growth," Govertsen said.

Galaviz said as new projects in Macau come online, it will stimulate greater tourism demand for the gaming hub. But he also pointed out that new projects will likely have lower return on investments (ROIs) than projects built in the early 2000s.

"This dynamic is very similar to what occurred in Las Vegas over the years, where bigger and newer projects experienced lower ROIs, but were still healthy enough to justify the investment," Galaviz said.

In July, Las Vegas Sands reported that net income at its Sands China unit fell 40 percent year on year to $160.5 million in the second quarter. At the time, Adelson said that even though the results didn't meet his expectations, it was "premature" to label the quarter's performance as a trend, Reuters reported.

 

 

http://www.cnbc.com/id/49113232