Melco’s meta-Morpheus

Tuesday 1st of May 2018

Melco Resorts and Entertainment exited one of gaming’s most successful joint ventures early last year, putting it in a position to reap the full potential of its Asian properties and to chart its own path into new jurisdictions. The company is building an integrated resort in Cyprus and is pushing hard for a license in Japan.

It is also undergoing a transformation in its core Macau market, where efforts to rebrand its flagship property are at an advanced stage. Chairman and CEO Lawrence Ho offered us his perspective on the changes taking place and his views on wider market prospects

AGB: How are you repositioning City of Dreams, Macau?

At home in our core gaming market of Macau, the flagship integrated resort City of Dreams continues to progress towards the launch of its third phase. On track for completion in the first half of 2018, the rollout of City of Dreams Phase III will coincide with the opening of its new signature hotel, Morpheus, the world-first free-form exoskeleton high-rise designed by the late Dame Zaha Hadid, DBE.

Also as part of the ongoing revamp of retail, hotel and gaming facilities throughout the property, Melco announced the launch of a new luxury hotel brand, named Nüwa in December, replacing the former Crown Towers at City of Dreams in both Macau and Manila. Conceptualized by Melco, this hotel brand exemplifies our mission to deliver an ever-improving and holistic customer offer that spans the entirety of the gaming, entertainment and hospitality space. NÜWA Macau is the only property with a total of five 5-Stars for its offerings in accommodation, spa and restaurants including Jade Dragon, Shinji by Kanesaka and The Tasting Room. This extensive upgrade to our flagship property will solidify our leadership in the premium-mass segment, positioning us to offer customers Macau’s most fully integrated and modern gaming and entertainment experience. Despite multiple new resorts recently opened on the Cotai Strip, we believe that with Nüwa and the soon-to-be-opened Morpheus, City of Dreams will establish itself as a landmark in the Macau strip. Morpheus will add almost 770 new luxury rooms, suites, and villas, on top of new restaurant, retail and entertainment concepts. Together, they capture the increasing non-gaming demands from both gamers and tourists. Meanwhile at Studio City, we will continue upgrading entertainment offers and resort accessibility throughout the year, such as exploring plans for a Phase II expansion.

AGB: How will the opening of the Morpheus hotel help the business?

Morpheus will be the anchor of City of Dreams upon the completion of its Phase III development, adding new elements to our offering in luxury hospitality, entertainment and retail operations, in addition to new gaming tables for both VIP and mass players. In particular, mass luxury tourists and the premium mass segment will be its core demographic.

Morpheus is more than another building in Macau. An icon for quality, taste and vision, it is an architectural masterpiece and will become a tourist attraction in Macau. It signifies our commitment to supporting Macau’s ongoing transformation into a diversified world tourism and leisure destination, as well as our unique ability to imagine and deliver world-first projects that redefine and elevate the landscapes they share.

AGB: What is the timeline for the expansion of Studio City?

We are currently reviewing the development plan and schedule for the remaining land for Studio City. It is expected that the additional development will include a hotel and related amenities.

AGB: How is the Cyprus project progressing?

We are developing our first European integrated resort in Cyprus and have recently began our 30-year casino gaming license, the first 15 of which are exclusive.

City of Dreams Mediterranean will be developed in western Limassol and launched by early 2021. A temporary casino will operate in Limassol until the official launch of City of Dreams Mediterranean.

The Integrated Resort is designed in the Mediterranean style and it will be Europe’s biggest Integrated Casino Resort, with a total of 136 tables and 1,200 gaming machines, a five-star hotel with luxurious villas and 500 hotel rooms, 11 restaurants and cafeterias, a wellness centre, a sports centre, an extensive pool area with river woods and surf pools, a high-end retail area and an outdoor amphitheatre with extensive green areas. Also, in order to attract conference tourism, City of Dreams Mediterranean will offer 9,600-sq. metres of MICE facilities with a convention expo centre.

AGB: Why do you think Melco is the best partner for Japan?

We will do in Japan what we have done since our very first day, what we have delivered in Macau, the Philippines and Cyprus: build with local partners, invest in extraordinary world-first architecture and design, create sophisticated entertainment experiences, and embed state-of-the-art technology into everything we do.

Melco delivers better tourists. Partnering with Melco will help Japan attract higher-spending and more discerning tourists, because each of Melco’s integrated resorts is a unique landmark, it is designed to reflect and elevate the particular culture and landscape of the destination. City of Dreams Mediterranean will be built according to the principles of sustainable development and be tailored to fit Cyprus’s natural environment and landscape.

Melco improves communities, our properties have all-around economic impact immediately and consistently boosts the economy. City of Dreams Mediterranean is a good example, it is expected to attract an additional 300,000 tourists a year and will promote Cyprus internationally as a conference destination. The financial impact of the project on the Cyprus economy is expected to be approximately EUR700 million a year, which is around 4 percent of the country’s annual GDP, after the second year of the Integrated Resort’s operation. It will also offer around 4,000 local job opportunities during the construction phase and around 2,500 permanent jobs once it is fully operational.

AGB: What is your view on the outlook for Macau?

2017 was a turnaround year in our core market of Macau. Rebounding to register consecutive monthly growth throughout 2017, Macau gaming revenues improved in both the VIP and mass market segments, followed by another year of expected robust growth in 2018. Buttressing the geography’s increasingly favorable visitation patterns will be the deployment of new infrastructure developments making tourism more accessible and convenient, particularly for travelers from mainland China and overnight visitors throughout the surrounding region. These developments include the opening of the new Pac On Ferry Terminal, the ongoing development of Hengqin Island, the completion of the Hong Kong-Zhuhai-Macau Bridge, the build-out of the Cotai Strip and the rollout of a light rail transit system throughout Macau.

While VIP gaming registered strong performance over the year, we maintain our long-term thesis that future growth in Macau will be driven by the premium-mass and mass segments. Accordingly, we will continue to invest in balancing our exposure to both VIP and mass revenues, as well as to entertainment and leisure sales from the ever-expanding non-gaming revenue pie as Macau evolves into a diversified global tourism destination.

AGB: Is the concession renewal process a concern?

The first of Macau’s gaming concessions are set to expire in 2020, and Melco will work closely with the Macau government to renew our concession license.

From my point of view, Melco has always done more than most of our competitors from a diversification/non-gaming standpoint. We listened to the Macau government ten years ago in terms of what they wanted, so I think we want to continue to be good partners and again, continue to do more for our colleagues and do more for the community as well.

Operator Update

SJM Holdings (880:HK) has 20 casinos on the Macau Peninsula. The company has been losing market share while it completes construction of its Cotai IR, which most analysts now expect to open in 2019.

The company has announced that its Chairman Stanley Ho, known as the father of gaming in Macau, will retire to be replaced by his daughter Daisy. Ho’s fourth wife Angela Leong and Timothy Fok were named Co-Chairmen and Executive Directors of the company with Dr Ambrose So elevated to Vice-Chairman, Executive Director and CEO. Analysts were sceptical the changes at board level would help the company to regain ground in Macau, where it has been losing market share.

Recently, the company’s Grand Lisboa Hotel was the title sponsor of a Dota 2 eSports tournament in December. It was the first international eSports competition held in Macau, with nine teams of contestants coming from around the world.

Galaxy Entertainment Group (27.HK) has three main properties and runs three City Club casinos inside hotels. The company’s Galaxy Macau Phase 2 and Broadway at Galaxy Macau opened on May 27, 2015, almost doubling the capacity of the resort. The property is viewed by analysts as one of the best placed in Macau, having made considerable efforts in recent years to boost its mass market appeal. Galaxy was recently chosen for inclusion in the Nikkei Asia300 Investable Index – a newly created index of Asia’s biggest and fastest-growing companies, which is designed to be used as an underlying index for financial products such as investment funds.

The Nikkei Asia300 Investable Index comprises 300 Asian listed companies, with constituents picked by Nikkei as companies to watch in Asia. GEG is the index’s only Hong Kong listed gaming company and one of only 34 Hong Kong companies represented.

Sands China (1928:HK) has five properties in Macau. The new $3 billion The Parisian opened in September 2016 and is now a key driver of group results. It features a scale replica of the Eiffel Tower, nearly 13,000 hotel rooms, two million square feet of retail-mall offerings and two million square feet of MICE capacity. Sands China’s Q4 results beat analysts' expectations, driven by strong premium mass revenue in Macau, which gained 52 percent year-on-year, compared with a 7 percent gain in base mass, according to Union Gaming analysis. Total net revenues increased 12.9 percent to US$2.10 billion compared to US$1.86 billion in the fourth quarter of 2016 and above The Street estimate for $1.94 billion. Net income increased 49.1 percent to US$519 million, while hold-normalized EBITDA came in at $758 million, representing growth of 30 percent over the prior year. Bernstein Research noted the company is optimistic about further growth in the premium sector, which is being driven by more younger players coming from provinces outside Guangdong and higher average spend per customer.

Melco Resorts & Entertainment (6883.HK) has three casinos and the Mocha Clubs. The company operates the City of Dreams and Studio City in Macau and the City of Dreams Manila.

In January, the company announced a major management reshuffle, with David Sisk named as property president for City of Dreams Macau, replacing Gabe Hunterton, who will leave the company.

Geoff Andres, who is currently president of of City of Dreams Manila, will replace Sisk as property president at Studio City in Macau. The company is now exploring possible Phase 2 expansion for Studio City and has been granted an extension of the development period under the Studio City land concession contract. It is expected that the additional development will include a hotel and related amenities. For Q4, MLCO reported net revenue of $1.33 billion, a gain of 12 percent, which was in line with expectations. Adjusted property-level EBITDA was $340 million, also up 12 percent. Analysts say City of Dreams is underperforming the company’s other Macau properties.

Wynn Macau (1128:HK) operates two resorts, with its $4 billion Wynn Palace opening in 2016. The company’s original property is on the Macau Peninsula. The Wynn Palace has 1,700 hotel rooms and 90 percent of the resort will be non-gaming. The company’s Q4 2017 results beat expectations, with adjusted property EBITDA gaining 64 percent to$376 million year on year. Net revenue came in at $1.31 billion, up 43 percent. Both mass revenue and VIP performed strongly, gaining 36 percent and 20 percent respectively. Despite the positive results, the group’s share price has been hit hard after founder and CEO Steve Wynn was forced to step down following allegations of sexual misconduct. Representatives from the Gaming Inspection and Coordination Bureau reportedly met with top executives to discuss the situation.

MGM China (2282:HK) is operating a single casino on the peninsula. MGM China’s Q4 revenue gained 10 percent, pulled up by the mass market, which benefited from a gain in both volume and hold percentage. Net revenues were $549 million. Revenue from main floor table games was up 21 percent, helped by a 10 percent increase in volume and a gain in the hold to 21 percent from 19 percent in the same period a year earlier. VIP revenue fell 5 percent, even though turnover was up 23 percent, as the hold fell to 3.1 percent from 3.7 percent the year before.

The HK$27 billion MGM Cotai opened its doors on Feb. 13. The company said the initial demand and customer feedback to the resort has been positive. Like its main competitors MGM is also actively seeking a license to operate in Japan.