The credit crunch and high gasoline prices have squeezed consumer spending and curtailed travel — bad news for casino resorts. Stocks in the sector have taken a beating: MGM Mirage lost 60 percent of its value this year through August 28, and Las Vegas Sands Corp. 56 percent. But that doesn’t faze Lawrence Ho, chairman and CEO of Hong Kong–based Melco International Development. Its Nasdaq-listed Melco Crown Entertainment subsidiary, down 43 percent year-to-date, to $6.55, boasts an 18 percent share of the gambling market in Macau, a Chinese special administrative region that is on pace to surpass Las Vegas in gaming revenues by 2010.
Ho, also co-chairman and CEO of Melco Crown, has no small stake in that outcome: a $2.5 billion, 2,500-room City of Dreams complex in Macau that he literally dreamed up four years ago and expects to open in the first half of next year. It’s a gamble he remains comfortable with at a time when others are pulling back. Boyd Gaming Corp. has put on hold its $4.8 billion, five-hotel Echelon project in Las Vegas, for which it broke ground in June 2007. MGM Mirage is deferring $383 million in capital expenditures, though it is pressing forward with a Las Vegas megadevelopment, CityCenter.
“Others step aside and wait for things to blow over,” says Ho. “We see the current climate as an opportunity.”
Even as Melco Crown’s market capitalization has been whittled down to $3 billion, from a high of $8 billion following its December 2006 IPO, Ho, 31, believes in making bold moves at seemingly inopportune times. In the post-9/11 gloom of 2001, the young University of Toronto graduate and son of Macau gaming magnate Stanley Ho acquired what he describes as a distressed asset, Melco, then running floating restaurants in Hong Kong. Within two years Macau authorities had mandated the breakup of Stanley Ho’s gambling monopoly, which Lawrence describes as “dingy establishments catering to hard-core gamblers.” Five other companies gained licenses to compete, and father and son joined forces in a new venture, a Starbucks-inspired chain of slot machine parlors called Mocha Clubs. The first opened in 2003, when the Asian economy was reeling from the SARS scare; by 2007 seven locations had 1,100 machines operating.
Melco International, whose holdings in addition to Melco Crown include a slot machine supplier and five Chinese ski resorts, reported a HK$614 million ($79 million) loss in the first half of 2008. But excluding noncash and nonoperating items, it had a HK$16 million profit, reversing a HK$323 million loss a year earlier. Melco Crown swung to a HK$131 million profit from a HK$298 million loss. Ho discussued Melco’s development and next steps with Institutional Investor U.S. Editor Jeffrey Kutler.
Institutional Investor: How much has Stanley Ho had to do with Melco?
Ho: My father and I have a great relationship, but when it comes to business, it’s arm’s-length. We got into gaming because his monopoly in Macau was broken. I went to him and said, “Las Vegas Sands is going to open here. You need fresh ideas, so why not partner with me?” It wasn’t the greatest deal: We invested 100 percent of the capital and operational costs in new slot parlors and gave him 50 percent of the revenue. It was a big cost, but our foot was in the door, and we turned the old paradigm on its head with the more relaxed environment of Mocha Clubs. Then we started developing the Crown Macau Hotel Casino, which opened in July 2007. Now we are getting closer to City of Dreams.
Why is it called Crown Macau?
In 2004, I realized I needed an international partner. I went to the U.S. first, but people weren’t seeing the potential of Macau quite yet. Crown in Australia, on the other hand, had a lot of Asian patronage and understood the market, so we formed a joint venture focused on Macau. By 2006, Melco’s deal with my father was still in place and very advantageous for him, and I decided it wasn’t sustainable for us to give away that much revenue to effectively rent a license. To get our own license, we engaged in a nine-month negotiation with Steve Wynn of Wynn Resorts. We paid him $900 million, beating out Harrah’s and some others, and that allows us to control our own destiny. It may have seemed like a lot of money at the time, but without the license, our margins would have been negative, and now that the government is saying there won’t be more licenses, ours looks pretty cheap.
What will distinguish City of Dreams from Crown Macau and other resorts?
Crown Macau, which had a construction cost of $500 million, is almost a boutique, a high-roller VIP hotel and casino. City of Dreams, with a construction cost five times that, is an all-out, Las Vegas–type integrated resort with shows and attractions.
Are you trying to out-Vegas Vegas, where resorts keep getting bigger?
Personally, I always hated the hotels in Las Vegas and wanted to do something completely different. Casino customers want to be treated like kings, and the Vegas experience of waiting 45 minutes for a pot of hot water or losing your laundry just isn’t pleasant. With City of Dreams, instead of one 2,500-room hotel, we have chopped that up into four hotels — a six-star Crown; a five-star Grand Hyatt twin towers; and a younger, cooler, four-star Hard Rock, in addition to a five-star, 800-room block that we are working on as a last phase. I’ve been asked, “Why not just build a massive, triangular structure?” Yes, we’d save on some construction costs and efficiencies, but the customer experience isn’t just about how much money you throw at the concrete. It’s really about service and the total experience.
How are you dealing with potentially skittish investors?
Most Melco shareholders are based in the U.S., so I try to go there at least three times a year to update them on us and on happenings in the market and in China. You might expect people to want to hide in an environment like this. The gaming sector has been completely decimated. But it’s better to be out front, telling investors that the fundamentals are strong, our market is very strong, and we are doing well and hitting our numbers. China, which is where our main customer base comes from, is still growing very well.
In this economic climate is it a plus not to have a U.S. market presence?
The fact is that the world has become borderless. The credit crunch hasn’t affected just the U.S. We would know: We were doing a syndicated loan for $2.75 billion in August 2007 and the whole U.S. tranche got killed, so we had to downsize it to $1.75 billion and do it out of Asia. Thankfully, we did it then; it would be impossible to raise the money now. Having said that, China is just so big, and the people are climbing the consumption ladder so quickly as disposable incomes grow in excess of 10 to 15 percent [annually], that the future path is bright. They are spending more on leisure activities, whether that means going to Macau to gamble or taking the kids to a ski resort.
Does calling Melco a conglomerate raise red flags with investors?
The word “conglomerate” is a little misleading — investors may shriek when they hear it — so we are careful to say we are a new generation, with a focus on gaming and entertainment. We are equally focused on our region. Dabbling doesn’t work.
How do the pieces of the conglomerate fit together?
Ninety percent of the value of the Hong Kong parent company is in Macau gaming, which is Melco Crown. Our total of 9,000 employees is going to double in the next year, with the opening of City of Dreams. We have another U.S.-listed company, Elixir Gaming Technologies [on the American Stock Exchange], which focuses on the slot participation business, sharing revenues with venue owners in Cambodia, the Philippines and Vietnam. Melco China Resorts (Holding), listed on Toronto’s TSX Venture Exchange, is the biggest ski resort developer in China. Melco LottVentures, which trades in Hong Kong, is building a pan-Asian portfolio of lottery businesses. We also have a financial services business that is not a core focus at the moment. We have learned in the past few years about the synergy in the resort development and gaming industries and have branched off in a very focused way.
What is your outlook on China post-Olympics?
Before the Olympics I went to Athens and learned that the 2004 Games forced the government to invest in infrastructure and open the city to the rest of the world. I think that will be the legacy of Beijing as well. Tourism will be even stronger; there will be more capacity for ordinary travelers. We need the same thing in Macau, where gamblers have historically squeezed out leisure travelers.
