Galaxy Entertainment Group Ltd had a fantastic 2012. Can the company repeat that this year?
Last year was very good for us. It was a good year for Macau, as well. In 2012, the outside political landscape was a bit turbulent and we went through a couple of elections, in China and in the United States. It was a very challenging year but Macau still experienced some healthy growth.
A lot of people in the industry – not just me – have been saying that, being the biggest gaming city in the world, you cannot expect Macau to be able to continue with 40 percent year-on-year growth rates. Moving forwards, as the denominator gets bigger, we should be realistic.
Everybody should understand that the future, from the point of view of the central government and the Macau government, is to make Macau not a casino-only city. They want it to be more of an entertainment resort destination. In addition to pushing gaming, you will probably see a lot of us [gaming operators] focusing on non-gaming as well.
In non-gaming, the growth by itself, in absolute terms, is fantastic. If you compare it within the same equation as gaming revenue, probably you will find we are not moving the needle. That is not true. We are moving the needle year-on-year in terms of absolute amount. A lot of the non-gaming revenue is moving, ours especially. The UA Galaxy Cinemas [at Galaxy Macau] is already the biggest revenue-producing cinema house in all of Macau and Hong Kong for the UA movie chain. These are fantastic numbers and that encourages us. We see a way forward in moving Macau not purely from a gaming point of view, but a more holistic entertainment approach.
The second phase of Galaxy Macau is expected to be a big contributor to that development. How is construction going?
I have been speaking of phase two as a more non-gaming component. We emphasise shopping, the additional pool deck area, more hotel rooms, more convention centres. Those are the things that we think are going to grow the market. It is somewhat shown in the gaming revenue. Mass gaming is by far the component growing the fastest. We expect this trend will continue in 2013.
We are concentrating on continuing as fast as we can, without sacrificing quality, to build phase two. We are still on track to finish in 2015.
The budget stands at HK$16 billion [US$2.06 billion]?
At this moment, yes.
Unlike phase one, which was focused on Asian brands, phase two brings in U.S.-based Marriot International Inc to manage the two new hotels, a Ritz-Carlton and a JW Marriott. Will that lead to a reshaping of your marketing proposal?
No. Phases one and two should combine together in a seamless integrated resort. Phase two has always been there since day one. But in 2006, if we’d been saying we wanted to build a resort with 1 million square metres and 3,600 rooms, everybody would have said we were dreaming. That was one of the reasons why we decided to take a more realistic approach. We built phase one and scheduled to build phase two when things went well, depending on the demand. We anticipated it, and announced the phase two construction in April last year.
Why did you opt to bring in another company to manage the new hotels and not have Galaxy Entertainment manage them, as you did with phase one’s Galaxy Hotel?
We did research. In the past couple of years, Ritz-Carlton and JW Marriot have gained tremendous exposure in China. We felt that these are brands that mainland Chinese would be able to connect to. Not only that, we sat down with the people from the Marriot group, we talked to them and we found that we share the same language. They understand the Asian and China market really well.
Rising construction costs
Previously, you said it would be a Galaxy Entertainment objective to offer cheaper hotel rooms. In phase two, they are still not there.
I never used the word “cheap”. It should be “affordable luxury”. When people come to a place like Macau, which is larger than life, you have got to make sure they are happy to stay here, and that all the things that we do go beyond their expectations.
Phase two is part of the five-star integrated resort that is Galaxy Macau. We are not going to deviate too much from what we are doing right now.
In phases three and four, you will probably see something very different.
Regarding phases three and four, in December they were announced and you said phase three would start by the end of 2013. It means Galaxy Entertainment will have construction going on in Cotai until 2018. Why did you feel the need to announce these plans so far in advance?
We didn’t make a too-far-in-advance statement. What we have said is that, if possible, we will start to break ground by the end of this year.
What has been the government’s feedback in terms of construction licences?
The land already belongs to us. I cannot say that we have the construction licence today. But we have been working on it since day one. All along, we have been planning all the pieces of land.
The combined budget for phases three and four ranges between HK$40 billion and HK$50 billion. That is a lot more than phases one and two combined, forecast to cost HK$32.5 billion. Why the price difference?
Do you know construction costs have increased by 30 percent over the past three years? Do you know how much labour costs are today? We feel costs are rising. I am not the only one saying it. People in the real estate industry have all been saying that.
You also mentioned that phase three would include creative industries to attract middle-class families. Can you elaborate?
We think the middle class, when they come here in the future, will be looking not just for gaming. You can see it in the whole evolution of visitors coming to Macau. Ten years ago they basically wanted to gamble. But now people come here not just for gambling any more. They want food, drinks, entertainment, and they want to see a show. As long as the middle class in the region continues to mature, you will see these people wanting a bit more of everything.
The right timing
This is where the plans for an arena in phase three come in.
The arena is only the hardware. Of course, we are going to put the state-of-art technology there. What we have in mind is that, by the time we finish, it will be the best arena in the region. But this is just a piece of hardware. You still have to worry about your programming, your software, what kind of shows, artists and performances you will be able to bring. That is a big challenge. We would like to make sure we would be able to diversify the offering now available.
Are you looking at having a resident show?
We will be looking at all options. We are going to have more than one venue.
Meetings and conventions is another bet for phases three and four. Do you feel the market is already there?
That is the wrong question to ask. The convention market will always be needed in Macau. The question should be the timing: when do you think the convention business will become important for the future growth of Macau? Take infrastructure into consideration, namely airlines, bridges, border crossings, human resources and hardware. All those components are equally important.
All major cities around the world want to fight for the convention market because it is lucrative, bringing a lot of wealthy people. We need that market to grow.
How will financing be done for phases three and four? Galaxy Entertainment has a lot of cash.
We have a lot of flexibility. We are not in any urgency to declare that we have to go to the markets for financing. We will be opportunistic.
According to the figures released, phase two will have around 500 live gaming tables, phase three around 600 and phase four another 400. How can these be squeezed inside the current table cap, which overall only brings around 2,000 additional tables by 2023?
We said it is the capacity we are able to host. We didn’t say we are going to have all those tables. It very much depends on the government. At the end of the day, we will just go along with the government policy as to how many tables each phase is going to have. We have confidence that we will have a fair amount of tables for us to be able to justify our investments.
Equal share of tables
Some analysts say the table cap doesn’t make sense. It doesn’t allow for operators to invest in the mass market. With fewer tables available, they are likely to dedicate more units to high rollers. It also makes it harder to introduce new games. Do you agree the cap should be rethought?
It would be irresponsible [for the government] to say, “How many tables do you want? We are going to give it to you.” Being a responsible government is ensuring that things are being done with moderation and some degree of understanding of how much the market can take each year.
Even if you have 400 tables coming in, do we have the needed labour force, hardware and infrastructure? Do we have the customers? All that comes into consideration.
So far, I haven’t seen any of the operators coming out and saying they are really short of tables. Of course, everybody wants more tables, but this is another thing.
All operators have a reasonable amount of tables. Like I have advocated before, I think the best thing to do is to have an equal share of tables among the six operators, so that we don’t have to compete on that front and can concentrate on making sure our non-gaming components are the difference-makers.
Recently, reports mentioned fresh mainland curbs on junket operators. Did you get any information on that?
These are isolated events. If you look into what we have achieved over the past 10 years, you will see the industry is much healthier, growing in a much more positive direction. We are on the right path.
Could we have been able to stop all the vices in one year? Don’t you think this is a little bit too optimistic? We have come a long way already. I have confidence that the government will continue to do positive things to make the industry healthier and more sustainable. I have confidence in it. If not, I would not spend HK$50 billion in Macau.
Are you afraid that there will be over-supply in Cotai, where there are at least six mega-casino resorts in the pipeline?
It is a good question to ponder. The past 10 years have been absolutely fantastic. I had not envisioned that the market would be able to explode so quickly. But even today, if you ask me what will happen in the next 10 years, I still say we are just starting.
Take a look at the bigger picture: the border checkpoint is being expanded, the Hong Kong-Macau-Zhuhai Bridge is being built, the high-speed train is coming in. Our own light rail transit system is only now under construction. And you have this huge Hengqin Island next door being developed. If you add all these together, I see a whole different chapter developing. What kind of future lies ahead for Macau? Only good things, provided that everybody, including the government, investors, bankers, the workforce and the community, all support this.
This is where I keep using my little, limited influence to always encourage people in charge of that vision to be a little clearer about it. Do we want to be a world tourism and leisure centre? We have a very good opportunity to achieve that. We can be the number one entertainment city in the world.
Ahead of the pack
What is the biggest challenge in achieving that?
It is for every segment of the community to understand what we would like to achieve. If we are not all on the same side, it is not easy to move forward.
First of all, we need to continue to have the central government supporting Macau to become a world tourism destination. Without its support, we cannot do anything. We have to understand that 60 percent of tourists still come from the mainland. We need to make sure that, whatever we do in Macau, it is going to be in the direction preferred by the central government.
Secondly, it is important the Macau government ensures we have policies to achieve that goal, for instance regarding imported labour and construction. The local government is also important in providing a vision and having plans to support it.
Also, it is about the people, the young people, being able to grab and understand that vision. This is very challenging. Their plan should not be going to work as a dealer. We need to make sure the young people in Macau understand there are many opportunities to grow, and that they take advantage of them.
Take a look at Shanghai, Beijing, Singapore or Hong Kong. Young people there grabbed their opportunity when it came in previous decades. This is the decade of Macau. Will our young people be able to grab this opportunity? It is up to us.
Regional gaming competition is not a problem?
I don’t see regional competition being able to take away whatever we have achieved in Macau. We have the advantage of having started much earlier, in 2002. Everybody is trying to catch up.
We have a government that is very supportive. We have a population still very supportive. As long as we continue to have support, the next 10 years will be vital for us, to make sure the entire infrastructure will be in place ahead of everybody else in the game.
We [the gaming operators] should not be competing with each other here. There is no point. All six of us have a lot of space to grow. We are all still growing. Competition, for us, is not to compete with each other, but to compete with the region.
Is there a lack of cooperation among the operators here? The association established in 2009 to gather the six casino companies together is inactive.
Desirably, we would like to have an official body to represent us. But that doesn’t mean we are not talking among ourselves. We are. On each level, we do have very good communication among the six of us. It could be better, but it doesn’t mean we are not talking.
There are certain reasons why an official body should be established: to make sure some common interests of the industry can be discussed on a more official platform. But it is going to take some time.
Are you looking for investment opportunities elsewhere in Asia? Officials of the Philippine Amusement and Gaming Corp have said your company has expressed interest in their country.
We keep exploring. I would be silly to say that we are not interested. Of course we are. It is all a matter of allocation of resources. Our return on investment at StarWorld is 99 percent. Galaxy Macau is giving us a return of 42 percent. I am still unable to find any other market able to give us that kind of sustainable growth.
Which jurisdictions are more appealing in Asia?
We would probably be interested in the whole sector. It very much depends on our reading of a lot of parameters such as political risk, policy risk or customer risk.
Right now, I haven’t seen any legislation coming out officially in Japan or Taiwan. It is a bit premature to show interest.
In Korea, we have been asked to go to have a look – not now, many years ago. So far we are still saying no because we don’t see that as a major market, as only foreigners can gamble. Vietnam is the same.
Interest in Hengqin
What about Hengqin Island? You have previously mentioned interest in non-gaming investment there.
Hengqin is definitely a place we should be interested in because it is close by Macau. One thing that, unfortunately, Macau doesn’t have enough of, is land. If you are looking to the non-gaming side of the business, you probably see that Hengqin could add a lot of strength to promote Macau as a world entertainment destination. We continue to be interested in Hengqin.
When can we expect a decision?
We continue to hold conversations with the Hengqin authorities. It is a matter of gaining common understanding on whether we could be able to do certain things together. I continue to be optimistic that one day we will hopefully land in Hengqin.
What are your first impressions on the partial ban on smoking inside casinos, imposed in January?
This is progress that we are making. People want this to happen. At the same time, we are still implementing it. It is premature to say whether we need to do more or less. We should be a little bit more patient and hear all segments of the market.
At the end of the day, nobody wants to see that, by having a thorough ban on smoking in casinos, suddenly all business goes away. Do you want to see it happening here, when all these new investments are coming into place? We have to be prudent.
