Let me start with City of Dreams’ entertainment crown jewel, The House of Dancing Water. Great reviews so far but a US$250 million (MOP2 billion) production does not exactly have a speedy return on investment. Was it money well spent? Lawrence Ho – Certainly money well spent. I have been working on this show for five years. From day one, even before Altira opened, my philosophy was for us to become the entertainment centre of Macau and, certainly, the entertainment centre of Cotai. Of course, at the end of the day, Macau is still a gaming town. You will never see 50 percent gaming versus 50 percent non-gaming like you do in Las Vegas. Still, what we need to do as a casino operator is to create more reasons for gamblers to effectively choose us over our competitors. US$250 million is a lot of money, probably the most expensive show ever created. [This amount] included the theatre that is a very specialised one. Ever since we opened, in mid-September, The House of Dancing Water has already been paying off in terms of generating a ‘desire’ effect. We are still at an early stage in Cotai and we didn’t have the first mover advantage. Venetian had that. So, for us to build up our brand equity, it takes a lot more effort. Having said that, ever since the show opened, we are seeing a lot of the intangible effects, with people coming to City of Dreams and staying here. There are still people advocating that gaming operators need to invest more on non-gaming in order to transform Macau into an entertainment hub. Do you consider that by bringing in this show, you are fulfilling your commitment to Macau? I certainly think so. We have always said that we follow the lead from the Macau government. They want to grow Macau not just as a casino town but as a real entertainment and leisure tourism city. I hope that they will agree with us, that The Bubble, The House of Dancing Water, Kids City, Cubic, all these non-gaming amenities we are trying to build, are helping to grow the multi-stay market. People did not have enough excuses to stay longer in the past because all the casinos were just casinos and hotels. What was the point of staying? But now, with the shopping we have, the shopping that Four Seasons has, One Central, with these shows, with good restaurants, I am convinced people will stay longer. Our biggest market is China and the Chinese patrons are now becoming very sophisticated and maturing very fast. Three years ago, they still wanted just to eat cup noodles at the gaming table. Now they want to enjoy the finest cuisine. It took 30 years for Las Vegas to fully develop its non-gaming and entertainment offerings. Will Macau follow the same philosophy? I have been a believer of that for the past five years. I wish it could have developed even quicker, but I am still a big believer. Assuming that all the infrastructure issues get fixed, this town has a great opportunity to grow the multi-stay market. At the end of this year, the gaming market, from a gross gaming revenue stand point, will probably reach US$22 billion, and that is excluding all the non-gaming stuff. Imagine when the non-gaming comes online. Forget about the 50:50 in Las Vegas. I would estimate the non-gaming results [in Macau] are probably less than 10 percent right now, but it is already a US$2 billion industry. Now imagine if it grows to 20 percent, 30 percent. We are talking about a potential of US$6 to 7 billion. Hopefully the government will also appreciate the amount of capital and effort we are putting in. “We deserve more land” By ‘appreciate’, do you mean the government should invest more in public infrastructure?Yes. Anyway, City of Dreams is 98 percent finished. We are firm believers in Macau and we are just behind Sands China, as the second largest investor here. If you think about it, we have probably put US$3 billion into City of Dreams, US$500 million at Altira, and we bought the license for US$900 million. We certainly hope to have the opportunity, in due course, subject to the government’s pace, to further develop in Macau. We hear a lot from our competitors and their future plans. What they want to do or what they want to steal from one another. We certainly want to be considered as well, given that we have already built a showcase. You are no longer interested in a piece of land on the Macau peninsula? Is Cotai definitely the place to stay?I have been a firm believer in Cotai from day one. Cotai is the way of the future. Also, on the Macau peninsula side, there are no decent sites and the market is already so competitive. You cannot put up a hotel on a 30,000 square feet plot, it is not competitive. Why would people want to go to a tiny little hotel and casino nowadays? I am hoping that Galaxy Macau’s opening will further drive the centre of gravity to Cotai. That way, hopefully, visitation and revenue coming from Cotai can exceed 50 percent in due course. So, you are interested in another piece of land in Cotai. Where exactly?In the whole Cotai area. There is obviously the Cotai Strip here but when Wynn and MGM properties open up there is going to be another exciting strip further down in Cotai. Do not forget that our license is still attached to the casino in the Macao Studio City project. Eyes on Macao Studio City If, by a miracle, the conflicts between the Macao Studio City promoters were solved [see Gaming section], would you still consider letting them manage a casino there under your license?Yes, definitely. I think the issue right now is unfortunately out of our control, because it is between the two shareholders [New Cotai and East Asia Satellite Television] of the Macau Studio City joint venture. We have consistently passed the message to them and also to the government that we are very interested to operate on that site, using any model. We are open-minded. Have you said that to David Friedman, from New Cotai, or Peter Lam, from East Asia Satellite Television?Yes, yes, we have passed the message to them that we hope they resolve their issues. Let’s talk frankly here: David Friedman does not seem interested in selling. Peter Lam’s side have not put that much money into the project and they could make a huge pile of cash by selling their share, after having pocketed already HK$1.3 billion with the selling of 40 percent to New Cotai. Why don’t they sell the rest? I do not know. Have you made them an offer?I cannot talk too much about that issue because there are still lawsuits ongoing in Hong Kong. Sometimes it is not only about business. I think a lot of bad blood has built up and potentially they need to work it out themselves. We have been very busy with City of Dreams over the last 12 months and, ever since we opened, with The House of the Dancing Water. So, we have not had the energy or resources to go and help to facilitate on that issue. And do not forget the financial market was very bad at the end of 2008 and 2009. Even if you wanted to do something, it was not possible. If they decide to sell, would you be interested?Yes. As with other undeveloped parcels of land in Macau, the government has threatened to take back the Macao Studio City land if there is no progress. As a businessman, do you agree that the government has that right, when no development takes place by the agreed deadlines? I strongly, strongly support that. We paid for our land, even the City of Dreams land we bought from my father. Once you make a commitment, you should build on it. Also, it is not like these people have bought their land and are sitting on it. They did not pay for it. If we want to develop Macau, the key is really creating employment opportunities, whether it is on the construction sites or in the services sector. If you are not building on it, you are not really creating any new employment opportunities. Junket games Let’s talk about hard cash and gaming. Wynn Macau, for the first time ever, and it is probably a wakeup call, is facing challenges with super junkets like Dawei (David) and Neptune transferring part of their operations to other casinos. Initially, it was said it was because of City of Dreams. No, no. I think people here took quite a bit of offense when it was said that MGM and Melco Crown were starting a price war and causing a disruption. For God’s sake, we were perfectly happy with our Cotai pact with Venetian, even before there was a commission cap. Yes, we opened three new junket rooms in July. We had an expansion. So we built more junket rooms and we expanded. But by no means were we trying to go out and disrupt the pricing mechanism in the market. Our strategic plans for 2010, defined at the end of last year, were that we wanted to go high margin. I can say it categorically. We have not touched our commission fee. We have not gone nuts with the credit support to our junkets or anything. We are probably one of the most conservative. I even think the MGM thing is overblown. It is not like David and Neptune are shutting down [at Wynn Macau] and moving their business to MGM. They are merely expanding [into other properties]. It is not like the good old days where the junkets dictated where to go. Players have preferences. They say ‘I want to go to Wynn. I want to go to City of Dreams’. So, it is important for a junket to have a presence [in different casinos]. If they don’t have a presence at that new place, then the person will say: ‘Well, I will find another junket’. You should really compete on the product and the services you have to offer, rather than just be constantly saying: ‘I will give you the best prices’. You have clinched third place on the gross gaming revenue ranking in Macau, and a more stable market share. What is the next target? We have never really cared about that market share [ranking]. We would much rather have higher cash flow and EBITDA. The easiest thing in the world is to loosen up on credit, open up a few more VIP rooms and convert a few more mass tables into VIP, then you can instantly grow the market share. Very easy. That is not really what we want. What we want is to create more value for our shareholders. If we just cared about market share and growing the VIP numbers, we wouldn’t have put together all the shows. What we really want to do is to grow the long-term sustainability of the business. So far, we have had consecutive quarters of EBITDA growth. But we look at our competitors and Wynn is probably going to do US$800 million in EBITDA this year, Sands China is probably going to do US$1.2 billion. We still have a long way to go but we have our targets in place. Mass market is the part of the business that you are focusing on the most now?Yes. We have done a good job on the VIP market. We have made some recent management changes, not just at top level but all the way down, in order to address some of our weaknesses. Now, we are putting more resources into those areas. The key for us is to grow on slot machines and on the mass market at City of Dreams because we have committed so much capital to this property. If you look at our return on capital, it is inferior to that of our competitors. Our goal is very clear: we need to grow this segment of the business. Will there be any announcement soon on the replacement of your chief financial officer?We have a search firm that is looking into it for us. When Melco Crown posts results, the media report that you’ve been narrowing losses. But ‘normal’ people do not understand the losses when it is such a lucrative market. Exactly. Why not just present the net profit and show that the company has been making a huge pile of money? Accounting principles. As I said, I spent US$900 million on the gaming license, close to US$3 billion on City of Dreams and another US$500 million on Altira. All that needs to be depreciated along with the length of the gaming license. That hits the bottom line and that is why we always like to talk about free cash flow generation. Of course we can do what Galaxy did and just simply write down the gaming license to zero and take the hit one time. Unfortunately, our US$1.7 billion project loan does not allow us that flexibility. Therefore, we will have to keep on amortising the gaming license the hard way. ‘We still need to outperform’ How many years do you need to get back all the money you have invested in Macau so far?We cannot forecast that because we are a US-listed company. Again, as I said earlier, there is a concerted goal from an organisational standpoint to really improve our return on investment. Analysts are probably looking at us generating US$350-400 million EBITDA this year. We hope to keep pace with the Macau market but, if it grows 20 percent next year, we need to outperform it well higher than that. On a net profit basis, how much money are these properties generating?I can only talk about results for the first two quarters of 2010. We generated close to US$100 million per quarter in terms of EBITDA. In the past, you said you agreed with the government’s restrictions on the importation of labour. So, what can be done in order for Macau to fill all the empty job vacancies?Macau is running out of available labour, without a doubt. I know Galaxy Macau needs to hire 7,000 people to operate that property. Can you really find 7,000? I think it is going to be difficult. On the construction side, we heard about the problems with [Venetian’s parcels] five and six and some more problems at Galaxy. But, at the same time, I also understand why the government is reacting that way. [Demonstrators are] a very small group but a very loud one. I think the government is in a difficult position but I certainly hope it will solve those issues. Even now, some of the service quality is becoming bad. People have a pretty low opinion of the service level in Macau. Bye apartment hotel Currently, you have almost a million square feet of space available on the City of Dreams parcel, right?Yes, for phase three. It is called the apartment hotel but more likely than not it is going to be just a hotel tower. Our view is that Grand Hyatt has ramped up very nicely since it opened, especially looking at the occupancy levels and its correlation to our gaming revenue. We were very busy opening everything in City of Dreams, so, probably next year we will consider what to build. If it is a hotel tower, will it be self-managed? It will depend. There are questions out there. You still have not decided if it is going to be a hotel or an apartment hotel. Is it because you are waiting on the final decision on the Four Seasons apartment hotel, namely if Sands China will be allowed by the government to sell them?No, no. That isn’t the principal driver anymore. In the past, we were more conservative and that is why we were observing what would happen over there. Our principal driver now is our business needs. More likely it is going to be just a hotel. A four-star hotel instead of a five star? We are looking at that right now. To target more mass market people that don’t have MOP2,000 to spend per night?Those are all issues that we are looking at right now. When you decide, will it be basically in order to offer a different product to a different crowd? That is the philosophy that we had with City of Dreams. We think it has worked out very well and that it caters to a very diverse crowd of people. We are very happy with it and we will continue to develop along those lines. Going centenarian Your company, Melco International Development, which has a 33.4-percent stake in Melco Crown Entertainment, was created almost 100 years ago. Yes, 100 years this year, in November. Not long ago, you, a young guy, came along and picked it up when it had faded into basically almost nothing. When you look at yourself in the mirror, what do you see?I wish that were true but I have a lot more to prove. We need to do better than our competitors. We are doing a lot better than a year ago but we still have a long road ahead. We built something great and I am very proud of it. At the same time, it is about results and our investors. Certainly I think the journey has been fun but we still have a ton of stuff to prove.
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