“Japan is our priority now”

Within a decade, more or less, you went from an almost non-existent company – Melco – that you picked up from [your father’s] group to a multinational gaming entertainment [enterprise] spreading its wings beyond Macau; notably, the Philippines, Russia, Cyprus, possibly Spain, maybe Japan. Ten years later, is this still just the beginning?

Lawrence Ho – We are very excited by the prospects because the company, Melco, is really based upon the growing affluence of the global middle class. Until 2030, there’s probably going to be another 2.5 billion new people joining the global middle class, and with 85 per cent of those people being China-based, in the Asia- based region, we’re potentially looking at two billion new customers for the next ten to fifteen years. So – this is just the beginning, it’s just getting exciting.

What do you have more on your plate? What other jurisdictions could be of some interest to you?

L.H. – I think that the last ten years has been very exciting and was really about building up the foundation and the infrastructure for us to grow in the future. But by far and away – and what we have learned, as well – is it’s always quality over quantity. Our main focus, without doubt, will be Japan: the liberalisation of the gaming market in Japan. Everything else is secondary at this point. So, what we want to do is make sure that we perfect how we operate in Macau, in Manila, in the regions that we are operating in. But in terms of development and initiatives, it is all about Japan.

Is that because you have been successful in stabilising your operations? Easier to do in Macau; in Russia, the small casino [Tigre de Cristal] started to make money in 2016, a little over half a billion Hong Kong dollars from a small loss in 2015; the Philippines, with way better results in the last quarter of 2016 and first quarter of this year? Is now the time to focus on what could be the next jackpot?

L.H. – Absolutely. I think Japan will be in the gaming world in my lifetime, and in most people’s lifetime, the Holy Grail. Macau is a great South Asia, South China play. But if you look at Japan and where it’s situated, it is great for north Asia, north China, Korea, Japan. There are a lot of opportunities there.

And fundamental to Melco Resorts to complementing its existing operations here – and in the Philippines and in Russia?

L.H. – It’s absolutely critical because if you look at the travelling time, for instance, somebody going from Beijing or Shanghai, it’s going to be quicker to go anywhere in Japan than to come to Macau. Having said that, in the future we will have the Hong Kong-Zhuhai- Macau Bridge (HZMB), and that’s why we are so excited about the future infrastructure support that is coming online.

We’ve been waiting for many, many years – whether it be for the ferry terminal in Macau, the Cotai ferry terminal, the HZMB, or the light rail. And Hengqin Island and the Lotus Bridge. Once all these facilities are opened, Macau is going to be a totally different place. [Nowadays] I like to call it the invisible ceiling of 30 million tourists. During peak holiday seasons people just can’t get into Macau.

It’s not the hotel rooms that are the problem. It’s the infrastructure. Once there are more access points and more aviation air routes to Macau it’s just going to turn the city completely into something even more amazing.

Nevertheless, Japan will be limited. We still don’t know how many licences, with legislation still being drawn up at this moment. Are you going solo or seeking a local partner?

L.H. – We’ve been roaming around in Japan for over ten years, and being very respectful and patient in the process, but at the same time we understand there are Japanese characteristics with this bidding process, and therefore we’ll definitely have local partners. There’s a lot that the government still needs to decide.

We want to win and we’ll do whatever it takes, but based on what we’re hearing – tax rate, policies towards allowing locals [to gamble] – they all sound very favourable. But, if any of these things change, if the tax rate becomes unattainable for an operator, or the fact that locals are not allowed, our interest level would completely be reversed.

What will Melco’s strategy be vis-a-vis other bids?

L.H. – We are the best Asian partner. We are not the biggest gaming operator, we are not the most global, but we believe that we are the most culturally sensitive, and if you look at our track record of working with partners…you know, the Crown partnership recently concluded but it was a great partnership, probably the most successful gaming global partnership in history.

Even with its conclusion, Crown and Melco do get along and we don’t rule out working together, unlike some other gaming partnerships that we’ve seen in recent years. We have a great partnership with SM in the Philippines, and even within Macau, at Studio City [with a hedge fund].

We work well with partners, and I think a lot of that is because how open-minded we are. I’m open-minded, easygoing, let’s talk it out. And, so, I think that for the Japanese corporates we would be, again, the most culturally sensitive, and at the same time the most easy to work with.

Authorities and industry insiders say a hundred per cent foreign ownership is not going to happen. Up to what percentage of ownership do you think it would still be interesting to secure return on investment in the short term?

L.H. – For us it really depends upon how many cities and how many licences. That is a big determining factor. And also which cities. Because we’ve heard many things in the past. It could be one licensee for the big cities, and then two big cities; and then maybe one regional licence in a smaller city. And so, depending upon where we pitch, and what opportunities are given to us, I think that is more important. Ideally, we would love to have a majority stake, but again if that was a big city, and it would require multiple partners, not just one local partner, but maybe two local partners, again, we are very open-minded and if we don’t have the majority from that standpoint, that’s OK as well.

You just mentioned the termination of the partnership with James Packer. It was important, at one time; it gave you the strength that you needed, but talking in a more selfish way, the termination is actually good for you…Because instead of dividing the cake, and a very tasty cake, you don’t need to, right?

L.H. – Absolutely. I think it also came at a critical time, because the unwinding of the partnership really started twelve months ago, in May 2016, [when] the market was still in a year- on-year decline basis. But even after two years of decline, I said ‘the market is coming back,’ in terms of some of the data that I followed. Global luxury goods sales were improving and the Chinese population now accounts for 30 per cent of the entire world’s purchase of luxury goods.

So, I saw the data turning around. It came together with the kind of rolling out of the entire corruption campaign in China. And Crown and James [Packer] felt it was time after ten years of being in the market to make a great return for their shareholders. They had some domestic Australian assets that they are committed to building out and we had a great, adult conversation and decided to start unwinding.

He [Packer] was not as confident as you at that time…

L.H. – Yeah, he was very strategic at the board level, but, you know, he wasn’t living it every day like I am. I’m here every day, kind of living and breathing this, going to China, talking to people.

The problems that Crown had with the arrest of 18 people and so on, has this had any negative impact upon your operations?

L.H. – I think that it’s one of those things that might happen, but I think that the good thing is, for us, we’ve always operated separately in terms of our activities in China, and so we were not implicated. I wish there was more that I could do to help, but the Chinese legal system is not something that we can provide a lot of help on.

In a way, it might have been a good lesson on the way to approach the Chinese market.

L.H. – Absolutely. We are always very careful. I think that all of the operators in Macau have lived up to and fulfilled what the government wants in terms of diversification, investing in non-gaming. We’re very proud of the House of Dancing Water, and all of the attractions at Studio City, but at the same time, having these non-gaming attractions, you know, frankly, in Macau, they don’t make any money.

People ask me, House of Dancing Water, ‘what is the payback period?’ and I’m, like, ‘there isn’t one.’ It is to infinity. It’s never going to pay back. But, the important thing is it is a good market differentiator, and it allows us to market into China because these are the types of amenity, the types of attraction that you can advertise. But, again, you need to be very careful especially in the industry that we’re in.

At least two gaming operators have already landed in Hengqin, to be the ‘Orlando’ of China. It’s a very interesting plot of land, huge, with a lot of infrastructure being developed. You are not there.

L.H. – We are not there. We’ve had some discussions in the past. I think Hengqin’s development is going to be fantastic for Macau, especially for the greater integration of the Pearl River Delta. But it will take time. Hengqin came at a time when we were deciding whether we should expand to, say, the Philippines or Hengqin Island. We made the decision back then that ultimately the opportunity was more exciting in the Philippines and, you know, we wouldn’t rule out opportunities down the road in terms of providing some additional non- gaming, fun elements in Hengqin.

As you say, entertainment is very interesting as a business but the return on investment is just a fraction of what gaming can be.

L.H. – Yes, it is very difficult. Again, the House of Dancing Water, or the Batman ride, as a stand-alone proposition, wouldn’t make any financial sense. And from a return on investment basis, our shareholders would be questioning why we would do things like that. But the beauty of having, you know, our casinos – whether it is the City of Dreams (CoD), Studio City, or even in Manila – they literally account for less than five per cent of the total GFA of our property. But it is the financial engine that let’s us do some of the amazing things that we can.

Speaking of gaming in the Philippines, CoD Manila started way slower [than other operators] and somehow, in the past six months, has picked up with business getting brighter and more interesting. Why do you think this is happening?

L.H. – We took a very cautious approach, it is a new jurisdiction for us. We started off with very little VIP and we wanted to grow into the market rather than flooding it. In the last two months, we have been the number one property, and a lot of this is really accredited to the team down there. They’ve really turned things around in terms of really looking how to grow revenue, but at the same time eliminated a lot of wastage, because when you open a new property inevitably there is wastage. So, it is an exciting time. When we first did the Philippines, a lot of people were uncertain about that opportunity, even internally. I think it’s worked out very well.

What is the cut of VIP and mass market? You invested more in electronic table games than traditional table games. Is it working better?

L.H. – In the Philippines the interesting thing is that of all the Asian markets – Macau, Malaysia, Singapore – I would think that the non-gaming contribution in the Philippines is probably higher than in any one of those markets. What we are seeing internally is that Macau is always going to be more like 90 per cent gaming, 10 per cent non-gaming, at best. In the Philippines we are seeing more than 75 per cent gaming and 25 per cent non-gaming. And so the dynamics are different. And electronic gaming does work very well in the Philippines because there’s a big domestic market as well.

But again, VIP is just taking off, and we really saw VIP improve as the Philippines’ relationship at the national level improved with China. I didn’t even expect it, but it is almost like Chinese tourists are watching how its country’s relationships with others are to choose where they go. And so China was at one point when we started probably the seventh largest exporter of tourists to the Philippines, and now it’s number three. It’s leapfrogged the Americans. I think the future, given its geographical location, is only going to be upside.

Pagcor (regulator and also operator of government-run casinos) is now heading in the direction of selling their 30-plus local casinos in the country. Would you be interested in bidding?

L.H. – We would be open-minded, but we would be very strategic in terms of looking at it because at the end of the day we prefer to build our own. I have been to some of the old Pagcor facilities and, you know, they are effective, like the SJM type of facilities on the mezzanine floor of some building. Those opportunities we wouldn’t be interested in at any cost. But if there was a bigger redevelopment opportunity, a whole hotel that we can redevelop, we would be potentially interested in doing that. Of course, we would talk to our Philippines partners to see if they would have any interest.

In Cyprus, you have the [gaming] monopoly. Is it going to be really interesting or ‘OK’ business; small but a door to other opportunities in Europe?

L.H. – It is a fantastic opportunity to have a monopoly somewhere within the EU, but it is an untested market. The European propensity to gamble is not as high as in Asia. And so we really have to see. At the same time, if you look at the geographical location of Cyprus, it is potentially a market for Israel and also a market for the Middle East.

Again, [our project in] Cyprus is in partnership with two companies and so our role there, effectively, is one third. So, we will continue to explore that in conjunction with out partners, and hopefully it will turn out to be quite exciting. I’ve been there quite a few times and it has nice beaches, nice environment, and it might be a longer-term opportunity.

Spain is now out of the picture…?

L.H. – In light of the fact that Japan is our number one priority, balance sheet aside, going to a new place, even for small deals, takes a lot of human resources, a lot of human capital, it’s a drain. And so I think that Spain for now we’ll kind of put it to the side because we want to put our firepower into what is the thing that can move the needle, which is Japan.

With your gaming and entertainment business growing, other areas, understandably, will grow as well. Aviation, for instance. At this moment, you have one airplane and one helicopter, and we were told that you are thinking of increasing the number of planes. Are you considering increasing the size of your fleet?

L.H. – Managing the customer experience is probably the most important thing in our business. And we’ve been very fortunate that our Philippines business is doing very, very well, and the fact that more and more tourists are going to the Philippines and also high- spending, high-roller VIPs are deciding to choose the Philippines as one of their destinations. I think that is why it has prompted us to potentially increase our fleet. So, perhaps having a fleet that is more focused on the ASEAN countries.

Let’s talk about Macau, which is still the most important. After all this time, a lot of success, a couple of mistakes, here and there. When you look back, what do you think you did right and what do you think you did wrong?

L.H. – Macau will always be the best market and we count our blessings every day to be here, and that’s why we are headquartered here. All of the foundations and infrastructure is going to be here, no matter if Japan or any other market is opening up, Macau will always be the best market, without a doubt.

Over the years, I would say that we’ve done more wrong than right, but at the same time we always have a mindset that we want to continuously improve. And that theory is all around the whole company. We don’t just want to be one of the boats that when the tide is rising everybody benefits. We always look at relative performance. I always joke that one of my happiest years was actually 2014-2015, when the bottom had fallen out of the market!

But I felt good because we were consistently beating our competitors and kicking everybody’s ass. What I care about is how we compete rather than saying ‘well, any dummy can throw darts at the board and hit the jackpot.’ That, to me, is less fulfilling. So, we’ve made a lot of mistakes, and we’ve learned a lot from the opening of Altira and how it was rushed – that was probably one of the biggest lessons in terms of when we first started. Altira turned out to be amazing. I am very proud of it, I love that property, it’s still probably the property that is most like my own style.

Studio City still doesn’t deliver as much as you would probably expect. So what changes are necessary?

L.H. – We built Studio City for the mid- market. That was always the key. The thing that Studio City still suffers from today is something that is actually out of our control, which is access. When we first started building it, we had assumed that the footbridge linking Studio City to the Lotus Bridge Immigration building would be completed. In my mind, also in the pitch that we gave our shareholders, was that it is a 60-second walk from the Lotus Bridge to the property. It is the first stop on Cotai. Now, a few things haven’t happened. Let’s put it that way. The traffic going through Lotus Bridge is only 7 per cent of the total in Macau versus over 50 per cent for Gongbei.

Now, I think that you can look at it as tremendous growth going forward in the future. But for now, with Hengqin Island, the buildings have taken shape but I don’t think anybody has occupied them. So, once Hengqin gets built up there is more energy with that part of the city’s area, more people will start to use the Lotus Bridge, and so that would help us. But, again, we don’t control what happens on Hengqin. The second, probably even bigger problem for us right now is the fact that the Macau Government is building a massive light rail station, right inbetween Studio City and the Lotus Bridge Immigration [checkpoint].

And so, what was supposed to be a 60- second very direct walk is turning into one of the most dangerous and treacherous walks a person can ever take. It is definitely scarier than bungee jumping to try to walk across there and so we literally get all of our traffic from the Lotus Bridge cut off by that building right now. I see the footbridge, the government has actually put the footbridge in place now, at least the foundation of it, and they are telling me that hopefully at the end of this year it might be opened.

I can only pray and continue to work with them. But, again, once the traffic clears up we should get a lot of foot traffic from that location. We have always imagined over 50 per cent of our own total traffic within Studio City would come from the Lotus Bridge. Right now, we get less than ten per cent.

With so many investments now, how do you position the properties? Sharing customers or different targets…?

L.H. – Part of the reason last year was a very busy year for us, in addition to the conclusion of the Crown partnership, was a massive management organisational restructuring. I wanted to put more emphasis on each of the properties because I felt that Studio City and Altira were not really getting the attention they deserved. In any market, they are great stand- alone properties; but within how we used to do it, with everything centralised, it was like, well, if something didn’t work at CoD, it passed to Studio City, and if that didn’t work, then it was passed to Altira.

But now the focus with Andy [Choy] at Altira and David Sisk at Studio City, and Gabe Hunterton at CoD is that they need to decide. They are all part of my Executive Committee team, but they are driving the properties. If there is something wrong with it, they need to fix it right away, rather than constantly saying ‘give me ideas, give me ideas.’ And that’s why our organisational structure has improved, and it is a lot more high-powered now.

How is the buy-out of the shares from Crown since Packer’s exit affecting other investments that you have lined up for Melco? Is it putting a strain on the current accounts, and how is it affecting investment in the group’s properties?

L.H. – It isn’t, because of the way we’ve always been structured. We’ve always been very conservative in terms of how we manage our balance sheet, and even with the Crown transaction part of the shares were share buy- backs from Melco Resorts. But the big chunk of it was really Melco International, which is the parent company, my holding company, buying control and buying a big chunk of it.

And, of course, in Melco International, we took on some debt and have great support from local Macanese banks, to do this transaction; ICBC Macau, in particular. But beyond that, all of the operating activities are really at the Melco Resorts level and Melco Resorts still has a very conservative low leverage, and certainly won’t preclude this from our activity in potentially bidding for Japan. And even our Philippines investment is separately listed on the Philippines Stock Exchange; it has its own balance sheet. We make use of the capital markets.

Now, we’re reaching that period in which everybody is very interested in the new licences. How interested are you and is it worrying that there is still no news? Don’t you guys need to prepare yourselves?

L.H. – We’ve always been very supportive of the Macau Government in its initiatives and, ideally it would be nice to know sooner, ahead of time, but I also understand the process that they need to go through. All I can say is that of the six we believe that we have been the best corporate citizen. And we hope and we wish that the government is going to take that into strong consideration in terms of, in the future, the re-bidding, re-applying, or the renewal of licences.

We face a new growth period, a ten-month recovery. How confident are you that mass and premium markets will continue to grow and that VIP stabilises? And that Macau will continue to deliver more?

L.H. – I am very confident. Looking at the trend in China, and also looking at the infrastructure that is due for completion in the next couple of years, all the right ingredients are there for Macau to be a complete, utter success. So I am very confident. But, at the same time, again, we care about relative performance. We want to do better than our competitors.

We are opening Morpheus next year, to complete the final phase of CoD, in addition to all the improvement works that we have done as part of the CoD, and unveiling CoD 2.0. It is an exciting time, but it is going to be a very competitive market and we just need to continue to outperform.