4 questions about the future (plus one)

There are four important questions that can help you understand the future of the giant STDM / SJM. But we put one more together, although the answer is obvious.

MB Feb 2020 Special Report | Casino Lisboa – 50 Years

Is the succession issue resolved?

The latest moves have served to shed some light on the intricate power puzzle at STDM.

Pansy, with the help of full sister Daisy, seems to have secured the strongest position, through the FOK alliance, but it is early to discard the other power bloc, which is in the hands of Stanley Ho’s fourth wife.

Angela Leong is the mother of the youngest children and intends to secure high positions for at least some of them.

It is not credible that we will see a new power struggle while Stanley Ho is alive, but it is too early to say that the succession issue is completely resolved: Angela Leong has not yet played her last card.

“In the end, if the Pansy Ho – FOK alliance is successful, there will likely be a cost to SJM,” highlighted Bernstein researchers. They are referring to Lisboeta theme park, which has connections to Angela Leong. “A deal with Angela Leong’s exit from SJM may come at a cost – an acquisition of the Lisboeta and the land on Cotai, may be part of any future exit.”

Nowadays, Pansy Ho seems to be better prepared for this eventual hypothetical ‘last fight.’

(Lawrence Ho, fully involved in Melco’s business inside and outside Macau, has been ruled out in this succession but in the medium term may still have a say.)

Will Grand Lisboa Palace (GLP) solve the problems?

Probably not all, but it is expected to contribute decisively to a recovery of market share.

As Brokerage Sanford C. Bernstein recently had noted, “over the past five years, SJM’s market share has fallen from over 23 percent to a historic low of 14 percent.”

The truth is SJM’s market share has been on decline for years and “the company is betting on GLP to be its savior.”

VIP play will be a prominent feature of the new resort, but it is known that this is a losing market.

The question is to what extent the expected growth in the mass market will make up for the recent decline in revenue from big betting (VIP).

What other problems remain unresolved?

1)      SJM has, by far, the lowest EBITDA margins in the Macau industry. SJM’s EBITDA margin is below its competitors, both at the consolidated operator level and within each segment that it reports. “The same weak comparison exists when isolating the analysis to only peninsula properties, where SJM currently operates,” states the same Bernstein report. “Poor operational efficiency is not merely solved by opening GLP.”

2)      “Poor business mix: More than half of SJM’s business comes from its Satellites business (52 percent for FY 2018), with a ~3% margin, which is effectively a royalty fee paid to SJM as a percent of GGR generated by satellite casinos” (Bernstein).

3)      “Unfavorable junket agreements, leading to low VIP margin” (Bernstein)

4)      “Although SJM has made some strategic hires into GLP, much of SJM management currently lacks experience in operating a large integrated resort on Cotai as well as very limited expertise with large-scale premium mass” (Bernstein).

What future for Casino Lisboa?

We ended this special report as we started, talking about old Casino Lisboa.

What does the future hold for it?

We asked STDM/SJM exactly that, but we got no answer.

It is understood that this is so: on the one hand, all the company’s efforts are centered now on the opening and operationalization of the GLP; on the other hand, working in Lisboa will not be easy.

The truth is that old Lisboa does not represent more than 2 percent of the group’s turnover at this point (see chart on these pages) and, sooner or later, it will have to be moved.

When the question arises, and it will not be for years to come, another factor will come together: the building’s architectural and patrimonial value may be difficult to make a profound conversion.

If its value as a casino is not evident, Lisboa could specialize in a non-gaming space as it has always been, with its famous restaurants.

The stupid question

If all goes well, the huge investment that represents the GLP (HK$ 39 billion, until a possible new update) will take 3-4 years to pay.

That is, only by 2025 will SJM have amortized the investment – in the middle of a new concession.

The scenario is so absurd that not granting the license would pose a serious problem for the bank syndicate that financed the loan (HK$ 25 billion).

The same would be true for some of the more than 20,000 workers in the business group (plus the 6,000 announced for the Cotai project).

That’s why this is the stupid question …

Still, as Jorge Godinho points out in his book “The Casinos of Macau” (2019), SJM cannot make the mistakes Tai Heng made in 1962 when it lost its monopoly to STDM or when, in the 2002 international tender, it was in the third and last position.