Evidence that James Packer’s partner in Macau is lobbying Japanese government officials to legalise gambling and win permission to build a casino in Tokyo or Osaka signals a bold ambition to capture more of the lucrative Asian high-roller market.
Packer’s partner in Macau, Lawrence Ho (the son of gambling tycoon Stanley Ho) is bumping up against development constraints in the highly regulated environment, where the Chinese government wants to limit growth to prevent the gaming industry from growing too quickly. Macau is the only part of China where gambling is legal.
Melco Crown Entertainment, jointly run by Packer and Ho who hold a one-third stake each, is already on the expansion trail, building its first venture outside Macau in Manila. The $US1 billion resort complex, which is being developed with Philippine partner Belle Corp, is due to open in mid-2014. It will join a flurry of new developments in Singapore, Vietnam and Cambodia, all seeking to lure both tourists and high-spending gamblers.
Managers of the Manila project plan to bring in south-east Asian and Chinese gamblers by taking advantage of their Macau connections, a strategy that would no doubt be replicated if Melco is able to expand into a third Asian market in Japan.
While casinos in Japan have been talked about for years, markets are betting that the 2020 Olympic Games could provide a catalyst for the government. The Japanese parliament is due to consider a bill in its next session that would allow the development of casinos. Given its control of both houses of parliament, a green light could come in 2014. That would give enough time for approvals, construction and opening ahead of the 2020 Games.
In addition to Melco Crown, US casino giants MGM Resorts, Las Vegas Sands and Wynn Resorts are all showing interest in the Japanese market (the world’s third largest economy), which could easily support two or three large players and could generate more than $US10 billion annually in gaming revenue.
Australia’s Aristocrat already has a small part of the Japanese market through its pachinko slot-style gaming machines. Pachinko, which is wildly popular in parlours across the country, is the closest that Japanese can come to gambling and could hint at the appetite for new gaming venues.
For Melco, Macau has proved a lucrative bet with its two casino resorts and interest in a third under development, on an island that has six times the gaming revenue of the Vegas strip.
Melco is now in a net cash position, helped by the refinancing of debt when it slashed interest costs from an onerous 10.25 per cent to new senior debt with a coupon of five per cent, and an equity raising to support the Manila development. Melco contributed a healthy $152 million in normalised net profit to Crown in the year to June, which will go some way to ease the pain of the loss that Crown made on selling its stake in rival Echo Entertainment.
Indeed, Melco will soon – probably next year – be in a position to start paying dividends to its shareholders, which will come in very useful for Crown as it heads into the peak funding period for Barangaroo in 2016 and 2017. That expenditure will likely be easily covered by operational cashflows, and the dividend would ensure some wiggle room.
Much to the chagrin of Echo, the $1.5 billion casino — sorry, “VIP gaming facility” — at Barangaroo will be liable to snatch a large part of Star’s modest VIP gaming revenue. There is one more state government approval needed, but the unsolicited proposal from Crown appears set to pass the hurdle after bypassing most public scrutiny and winning the key stage two approval.
Just when shareholders will get to see value from the expansion plans — which do not include the $2.7 billion already set aside for capital investment in the Perth and Melbourne casinos — remains to be seen, given the high cost of the investment involved.