Flood of gaming money into Macau good for Packer

The rapid influx of tourists from China pushed gaming revenue in Macau to USD 6.4 billion (AUD 8.2 billion) in the first 11 months of 2006, according to international credit rating agency Standard & Poor’s.
S&P said it expected cumulative gaming revenue to have overtaken the Las Vegas Strip in 2006 and to possibly top USD 10 billion by 2010.

The momentum presaged good fortunes for James Packer’s joint venture Melco PBL Entertainment (Macau), which is expected to open its first casino, the Crown Macau, around April.

In its research paper, „A High-Stakes Gamble for Macau’s Red-Hot Casino Operators“, the agency said visitor arrivals in Macau climbed 16 per cent to 19.8 million from January to November last year.

But S&P primary credit analyst Mary Ellen Olson warned that the agency would monitor the credit worthiness of all gaming companies in Macau closely this year because of increased competition.

The agency has placed the ratings of two gaming companies operating in the former Portuguese colony on credit watch.

Mr Olson wrote in the report: „As Galaxy Casino SA and Las Vegas Sands Corp comprise a third of licensed gaming operators in Macau, it’s reasonable to wonder if further negative rating actions are on the cards this year.“

The agency believed that while ratings volatility was likely, that was largely due to company-specific reasons rather than an indictment of Macau’s operating outlook. Market fundamentals remained strong for Macau operators because of the growth in tourist arrivals.

Mainland China and Hong Kong accounted for 86 per cent of all visitors. S&P said arrivals

should continue to grow, given Macau’s „rising prestige“ and the loosening of travel restrictions and increasing personal income levels in China.
Growth in gaming facilities had also boosted revenue last year, it said. The number of gaming tables rose to 2440 in the third quarter of 2006 – up 76 per cent since 2005. The number of poker machines rose 51 per cent.

However, S&P said long-term success hinged on the viability of the facilities at the Cotai Strip – reclaimed land straddling Macau’s two islands, Taipa and Coloane.

„Billions of dollars are being invested to transform Cotai from a wasteland into a vacation destination,“ the agency said.

An estimated 4000-5000 gaming tables and thousands of hotel rooms would be developed in Cotai over the next two years.

S&P says the question is: will there be enough gamblers to cover the huge costs?

Given the highly leveraged nature of the sector and concerns over future earnings, the agency said gaming companies in Macau would be monitored closely for their credit quality this year.

Of the six companies currently holding licences to operate in Macau, Wynn Resorts and MGM Mirage were rated BB-/Stable and BB/Stable respectively. S&P placed Galaxy on credit watch after its decision to issue $US240 million in convertible bonds last month.

It said its debt leverage was expected to significantly increase, accompanied by a weakening benchmark financial ratio.

Las Vegas Sands was placed on credit watch after it won the right to develop a casino in Singapore last year. The rating agency was concerned that the Singapore project „could stretch it too far“.

It said that changes to a company’s structure and ownership would influence credit quality in coming years.

„For example, when Melco PBL Entertainment (Macau) acquired a sub-concession from Wynn Resorts for USD 900 million in October last year, it clearly improved Melco PBL‘s market position and improved Wynn’s liquidity.“

Despite the uncertainties and potential risks in the Macau market, investor sentiment remained strong, S&P said. „This was highlighted by the entry of Melco PBL into the stock market in December, with the sale of USD 1.01 billion in ADRs (American Depositary Receipts).

In fact, capitalising on the strong investor response, Melco PBL raised an extra AUD 205 million in the issue.

The proceeds were earmarked for the company’s various Macau developments, which the company estimated would cost USD 3.3 billion.