Betting Big on China's Vegas

Las Vegas Sands (NYSE: - ) Chairman and CEO Sheldon Adelson has never been one to shy away from a bet, and on Aug. 28 he unveiled his biggest gamble yet: the Venetian Macao, a giant casino, hotel, and convention complex that cost $2.4 billion.

And that's just for starters. By the end of 2009, the group expects to spend as much as $12 billion on 14 more hotels with casinos offering a total of 20,000 rooms on a strip of reclaimed land called Cotai in the former Portuguese colony of Macao, an hour's ferry ride from Hong Kong. "Never before has such an entertainment center occurred in the history of Asia," Adelson told a press conference at the Venetian a few hours before it opened its doors to thousands of gamblers waiting outside. "The opening is the beginning of what has been my dream, to reproduce the capital of entertainment (of Las Vegas) in Asia for Asians."

Big doesn't even begin to describe the sprawling complex, which the group claims is the second-largest building constructed in one phase in the world; only a flower warehouse in Holland is larger. (The Boeing (NYSE: - ) factory outside Seattle is bigger, but was built in several phases.) The Venetian boasts 3,000 rooms, 51 gondolas for its Venice-style canals, a 15,000-seat indoor arena, and 1.2 million square feet of convention space. With 870 gaming tables and 3,400 slot machines, its 550,000-square-foot casino is the world's largest. The employee canteen, which serves a staff of about 10,000, has more than 20,000 pairs of reusable chopsticks.

In Development: The Macao Strip

Originally, Las Vegas Sands had hoped to entice major hotel chains to build their own properties in Cotai, but when there were no takers, the group revised its strategy and now is building them itself, while international chains will manage them. The collection of hotels will include properties run by the Four Seasons, Sheraton and St. Regis (NYSE: - ), and Hilton (NYSE: - ).

Plunking down so much cash in bricks and mortar in Macao may sound like a risky strategy, but not to Sands President and Chief Operating Officer William Weidner. "It's equivalent to asking if you could own 20,000 rooms on the Las Vegas Strip," he says. "If you could own the entire center of the Las Vegas Strip with $12 billion, you would do it today in a heartbeat."

Filling all those hotel beds is still going to be a major challenge. While Macao, a city of just 450,000, attracted more than 22 million tourists last year, they stayed on average only about 1.25 days. Weidner is expecting that convention-related guests at the Venetian will stay four to five days, and regular tourists two to three, with a strong weekend crowd visiting from Hong Kong and southern China. By October, he predicts a 90% occupancy at the Venetian, where suites go for about $200 per night.

Revenue Sharing Hurts Earnings

There's no doubt that many Chinese are already flocking to Macao. The city trumped Las Vegas last year as the world's biggest gambling destination, earning more than $7 billion in bets compared with $6.6 billion for Vegas. That lead looks to widen. Growth in the first half was up an explosive 46% year-over-year, to $4.75 billion, fueled in part by money from people who have made a killing on mainland stocks. The benchmark CSI 300 index is up more than 150% this year. "Macao is an indirect equity play for the region," says Gabriel Chan, gaming analyst at Credit Suisse (NYSE: - ) in Hong Kong. The market for high rollers "is totally driven by the wealth effect (from the stock market)."

Unfortunately for shareholders of Las Vegas Sands, that has not yet translated into higher earnings from Macao. After deducting expenses for junket operators who bring in the high rollers in exchange for a hefty percentage from net house winnings, first-half earnings before interest, taxes, depreciation, and amortization (EBITDA) at the 740-table Sands Macao (the downtown Adelson casino that opened in 2004) fell $2 million, to $228 million, due to what Executive Vice-President Bradley Stone described as "aggressive program" sharing of revenues with operators to pull in VIPs to its casinos. The Sands has seen its total market share fall from about 23% a year ago, to 17%-18% now.

Competition is certainly heating up. Las Vegas-based Wynn Resorts (NasdaqGS: - ) opened the first phase of a $1.2 billion casino and luxury hotel last September, and Melco-PBL (NasdaqGM: - ) started taking its first bets at the Crown Macau in May. MGM Mirage (NYSE: - ) will open a property before the end of the year. Already the pickings are thinning out. Daily gaming revenue per table has been steadily declining since peaking at $10,000 in 2002, when billionaire Stanley Ho's gaming monopoly had not yet expired. In 2006, the average take was just $3,200 because of the rapid overall expansion of gaming tables. It's going to get worse: As ever more properties come on stream in the next few years, that figure could fall as low as $1,800 by 2010, Morgan Stanley (NYSE: - ) gaming analyst Rob Hart said in an interview earlier this year.

More Like Asia's Atlantic City

Macao also attracts a big-spending clientele. Whereas Las Vegas casinos earn more than half their gaming revenues from small-time players feeding coins into slot machines, in Macao one-armed bandits only contributed to 4.1% of the take in the first six months of this year. Baccarat, where the minimum bid in VIP rooms can start at $40,000, accounted for 85% of total Macao gaming revenues.

Wynn and Adelson won their gaming concessions from the Macao government in 2001 largely on the promise they would help transform the former colony, with an image as "sin city," into a family-friendly multipurpose destination. That transformation is well under way. This fall the Venetian arena will host an exhibition basketball game between the NBA's Orlando Magic and China's national team, as well as a match between tennis legends Roger Federer and Pete Sampras. The Wynn Macao is sponsoring the musical Cats. In the spring, Las Vegas Sands will open a dedicated, 2,000-seat theater for Cirque du Soleil.

Another challenge of the Macao market for operators building big properties is that it has a lot more in common with Atlantic City than with Las Vegas. Most visitors, of whom more than 50% now come from mainland China, stay less than a day, but even those who do stay the night are more likely to spend most of their time at the gaming tables or in massage parlors, not sipping champagne in the Jacuzzis of luxury suites or browsing the marble-inlay malls selling Prada handbags and Gucci shoes. "Here in Asia, you will have a bit of imbalance because Asians like to game," says Weidner, who expects gaming to account for as much as 70% of gross revenues, compared with 50% in Las Vegas. "Ethnically and culturally, they are more comfortable with gaming as a form of recreation."