Packer and Ho in Macau makeover

James Packer and Lawrence Ho, two sons of billionaires, opened a USD 524 million casino in Macau in May 2007. It was a flop.

The empty building was „eerie,“ the 31-year-old son of casino magnate Stanley Ho said in an interview. Three months after Crown Macau’s grand opening, the two co-chairmen of Melco Crown Entertainment, its Hong Kong-based owner, decided it was time to „throw in a nuclear bomb,“ Ho said.

Packer and Ho ripped out two-thirds of their low-limit gambling tables and four-fifths of the slot machines to make space for high rollers. The casino shifted its focus from middle- class gamblers to VIP players who spend at least 1 million patacas (AUD 130,000) per visit.
The strategy handed Melco Crown 15% of Macau’s casino business in less than a year as it seeks to take VIP share from larger establishments run by Las Vegas Sands and Wynn Resorts.

„Before, Crown Macau couldn’t even break even,“ said Billy Ng, a Hong Kong-based analyst at JPMorgan Chase. „Now it looks like it’s making a profit.“

Melco Crown’s shares, which dropped 42% this year, will climb 67% over the next 12 months, according to analysts‘ estimates compiled by Bloomberg. That compares with predictions of a decline for Wynn and a 1.4% gain for Sands, based on Aug. 12 stock prices.

The shares were unchanged at USD 6.75 in Nasdaq Stock Market trading on Aug. 12.

‚Undervalued stock‘

„The stock is undervalued,“ Michael Perna, an analyst with AAD Capital Management LP in California, said in an interview. The fund manager bought 1.55 million Melco Crown shares, according to a second-quarter regulatory filing. He’s since continued buying, he said.

Melco Crown, which had a loss of USD 178.2 million (AUD 205,00) in 2007, posted a profit of USD 43.2 million in the first quarter of this year. It will report a second-quarter profit when it releases earnings today, according to the average estimate of four analysts surveyed by Bloomberg.

The company’s new focus on big spenders is also being applied to its USD 2.1 billion resort development called City of Dreams being built in Macau’s Cotai district. Among the VIP– oriented changes planned for the casino, scheduled to open next year, is a reduction in slot machines to 1,500 from 3,500, Ho said, which appeal primarily to middle-class gamblers.

„We want to be a higher-value proposition than“ Las Vegas Sands‘ Venetian Macao across the street, he said.

A City of Dreams

With City of Dreams, Packer and Ho have positioned Melco Crown to benefit from the anticipated increase in gambling revenue in Macau, Lawrence Klatzkin, an analyst at Jefferies & Co. in New York, said in an interview.

„City of Dreams will enable them to expand“ the VIP business further, said Klatzkin, who recommends buying the shares and expects them to rise to USD 19. „The Crown is pretty close to being capped out, it’s not a big facility.“

Ho and his partner, who is the son of Kerry Packer, the richest man in Australia before he died in December 2005, will face competition from brand names in gambling — even some from family. MGM Grand Macau, a venture between Las Vegas-based MGM Mirage and Ho’s older sister Pansy Ho, will almost double its VIP tables to 150 and convert the 34th and 35th floors of its development to exclusive gambling rooms, Chief Executive Officer Terrence Lanni said on an Aug. 5 conference call.

The Ho legacy

Patriarch Ho, who held a 40-year casino monopoly in the former Portuguese colony, never saw Macau as more than a gambling destination. Then, in 2002, Macau offered new licenses and the US billionaires and their well-known Las Vegas brands — Sheldon Adelson’s Las Vegas Sands, Stephen Wynn’s Wynn Resorts, and Kirk Kerkorian’s MGM Mirage — moved in.

Macau’s casino gambling revenue rose 55% to 58.7 billion patacas in the first six months of the year, accelerating from 47% growth in 2007. Local government data shows VIPs contributed about 70% of Macau revenue so far this year.

One tactic to lock up the VIP gambling market that „ruffled some feathers,“ according to Ho, was a deal struck with Amax Entertainment Holdings Ltd.’s 80%-owned junket operator AMA International Ltd. AMA brings in about one-fifth of Macau’s high rollers, according to Karen Tang, a Hong Kong-based analyst at Deutsche Bank AG.

Melco Crown agreed to help Amax raise HKD 2 billion (USD 295 million) on the Hong Kong stock exchange in December 2007 and pay AMA commission on high-roller junkets. In return Amax guaranteed a steady flow of wealthy gamblers from China to Crown Macau.

Tourists from Japan

When Melco Crown and rivals began to build a Las Vegas-style destination with five-star restaurants and top-draw entertainers, they aimed to entice middle-class Chinese and tourists to fill the thousands of hotel rooms they were building.

„We need to be able to draw a lot more visitors from places like Japan or South Korea,“ said Andy Wu, the president of the Travel Industry Council of Macau, an industry body representing local travel agencies. „These are the ones more likely to spend on things other than gaming.“

Packer and Ho and other casino owners soon realized middle- class gamblers weren’t necessarily staying away by choice. The city’s transportation infrastructure is underdeveloped, with older ferry terminals and proposed sky-rails that have never been built, making a Macau getaway less accessible.

To overcome the problem, some casinos such as the Sands have bought their own ferries. With infrastructure improvements and more rooms to accommodate bigger numbers, Ho said that „next year will be a banner year.“