When the Chinese government eliminated the gaming monopoly enjoyed by Stanley Ho and SJM in 2002, the six winning concessionaires launched a kind of a land rush in Macau. But that buying frenzy was limited to the city’s Peninsula area, where the sole casino, Casino Lisboa, was located, along with the majority of the city’s business enterprises on a narrow strip of land. Some casino companies also looked at Taipa, the next island up from the Peninsula, but since it is a densely populated residential area, the opportunities were few.
And the island of Coloane was simply too far, too desolate and hard to reach, and a residential community off limits to gaming.
So as the land search continued for months in the Peninsula, one man had a vision that required some thought and preparation.
Sheldon Adelson viewed the swampy, marshy land between Taipa and Coloane as the solution to his Peninsula problems. Even though his company, Las Vegas Sands, had scooped up one of the best parcels in the Peninsula to build the hugely successful Sands Macao, Adelson had grander plans, and the desolate Cotai (a combination of the Coloane and Taipa names) promised to provide land for Adelson’s outlandish plan, to create an Asian Las Vegas in Macau.
So Adelson went to the Macau government, whose vision for the expansion of gaming in the SAR coincided with Adelson’s, and arranged to buy a huge plot of land in Cotai to build 12 hotels, casinos and the amenities that would make Macau one of the major tourist destinations in Asia, at a cost of $10 billion to $12 billion. The complicated land purchase arrangement was formulated, and Adelson began to fill the marshy land with bedrock to build the first integrated resort in the region, the Venetian Macao, an updated replica of his hugely successful Las Vegas property.
When Adelson announced the Cotai Strip project—complete with an LVS trademark attached—he was immediately ridiculed by his competitors, who called it a “pipe dream” and a “boondoggle.” But at the same time, each of the competitors began to buy up land on Cotai and await the approval of the government for permission to build and operate.
While the criticisms of competitors can be understood, Adelson even endured doubts from his own staff. Rob Goldstein has been with Las Vegas Sands since the mid-1990s and now is president of global gaming operations for the company. He says he wasn’t alone in questioning the wisdom of the Cotai strategy.
“Everyone thought the same thing,” he explains. “The Peninsula was where the action is and that’s where you have to be. Sheldon was the only one who understood. This is one of the defining moments that separate Sheldon from everyone else. He had the vision. No one else was lining up to buy land on Cotai. I thought it was too far away, too difficult to develop and just not worth it. I was wrong.”
But the results of that decision were not as apparent as they are today. Considered too far from the ferry terminal that delivered millions of tourists from Hong Kong, Las Vegas Sands simply started a ferry operation of its own, delivering players to a Cotai terminal. Goldstein says it was Adelson’s strong belief in his opinion that was the difference.
“It’s easy to see now, but back then it wasn’t as black and white,” he says. “I didn’t see it, and plenty of other people didn’t see it either. But that separated us from the pack. It gave us a leg up that we still enjoy to this day. The important thing was, however, he backed up his vision with his bankroll. Not too many people do that.”
Goldstein says it was one of two decisions made by his boss that changed the face of the gaming industry. The first occurred in the 1990s when he transformed the old Sands property into a revenue powerhouse that includes the Sands Expo Center, the Venetian and the Palazzo.
“People don’t give him enough credit in Vegas, either,” says Goldstein. “He changed the face of Las Vegas more than anyone I can think of. He built the model for the non-gaming-centric property, and that’s what thrives in Las Vegas today. The driver of Las Vegas today is rooms, and that was Sheldon’s great revelation.”
Even as companies not related to Las Vegas Sands have thrived on the Strip as a result of Adelson’s choice, the same is happening in Macau.
“The ramifications of that decision (to develop Cotai) echoes across Macau to this day,” says Goldstein. “He’s made a lot of people a lot of money, and his vision has contributed to the explosive growth of the city of Macau. Think about where we would be today if Cotai hadn’t been developed. We wouldn’t have the mega-resorts, the Four Seasons, the thousands and thousands of hotel rooms and other amenities because we would have been limited to building on the Peninsula. You wouldn’t have the $4 billion in revenue that was achieved in March because that would have never happened without Cotai.
“And it’s really just begun. The great Galaxy development has just gotten started. Melco’s Studio City is going to be a fabulous project. And then when you add our last property, Wynn, MGM, SJM… It’s almost staggering to think that it was less than 10 years ago that there wasn’t even any land in Cotai.”
Grant Govertson, a gaming analyst with Union Gaming Group who lives and works in Macau, says Adelson deserves accolades for taking the chance on Cotai.
“We think that Sheldon deserves a lot of credit for conceiving the concept of Cotai,” he says. “Clearly, there was no other party more willing to take a risk to build a single casino (let alone multiple casinos) outside of the Macau Peninsula. History has proven him right and Cotai is becoming, in many ways, the center of gravity for gaming in Macau.”
David Bain, an analyst with Sterne Agee, agrees.
“While Sheldon Adelson has proven at times to be overly vocal with regard to sensitive issues that can cause small, near-term stock disruption, Cotai is one of several of his big bets that shareholders have extraordinarily benefited from,” he says. “His other visions or big bets include the Sands Convention Center in Las Vegas and Marina Bay Sands in Singapore. Sheldon is not afraid to go first and bet big. To date, he has been right with his company’s cornerstone projects (Sands Convention, Venetian, Singapore, Cotai) and should be considered an early visionary with regard to the Cotai Strip, in our view.”
The explosive growth of Cotai, however, raises questions. Unexpectedly late last year, the Macau government approved projects for all the remaining companies that lacked a presence in Cotai, as well as expansions and new properties by those already there.
In rapid succession, the government granted Wynn Resorts its land concession and permission to begin construction, land concessions for MGM China and SJM, approval for Phase II of Galaxy Macau, and the OK for Melco Crown to move forward with the development of recently acquired Macau Studio City.
After years of controlled growth and staggered openings of its integrated resorts, the approvals seemed to be a speeding up of the development process. Not so, says Union Gaming’s Govertson.
“In reality, the casinos will come online over a three-year period, from 2015 to 2017,” he explains. “I think this is broadly in line with expectations. It is also in line with government commentary that the timing of openings on Cotai would be staggered. What the government wouldn’t want is for all six properties to come online within a very short timeframe (e.g., one year), which would place too much of a burden on infrastructure, labor, regulators, etc.”
Sterne Agee’s Bain agrees that the government is still taking a steady approach.
“The pace of growth of Macau gaming has moved to manageable levels where a longer-term supply pipeline makes sense, in our view,” he says. “Macau is still a supply-driven market. Cotai developments are also in line with what the Beijing government has stated should be a long-term goal of Macau, to diversify from gaming. This includes a higher weighting of non-gaming amenities, which all the new Cotai developments will possess.”
Goldstein says he’s confident that the Macau government knows what it’s doing, judging from previous decisions.
“The Macau government has taken a very rational approach to development,” he says. “The government has really taken its time and didn’t rush into anything. It’s very well thought out, and I’m sure the upcoming development in Cotai will be done the same way. They have paced the development to the growth of the market, considering the labor it takes for construction and the labor it takes to run these things. People don’t give the government of Macau enough credit. It’s very interesting how they master-planned gaming development.”
But because the government has placed serious restrictions on the use of foreign labor, the almost non-existent unemployment rate in Macau is a challenge when trying to find enough laborers to build the new properties. Goldstein again places his faith in the government.
“I’m confident the Macau government will figure out how to (manage the labor pool) in a way that will be advantageous to its citizens and to the companies. They will take a measured approach. They will figure out how to right-size the labor pool to the demand.”
Bain believes it will be easier to loosen up regulations a bit because of the success the government has had in employing Macau citizens and assuring high wages.
“We believe the island’s 2 percent unemployment and benefits to Macau citizens via the projects should allow for politically acceptable solutions or exceptions to engage additional outside labor,” he says.
Walking or Riding
Since the Las Vegas Sands properties are the heart of Cotai, there are still some questions how traffic—both vehicular and pedestrian—will flow around the region. Today, a robust program of shuttle buses carts customers from one casino to another at no charge to the riders. Macau is developing a light rail transportation system that will span the entire city, but completion is still years away.
Bain believes that the transportation model is evolving, particularly when the new Hong Kong-Macau-Zhuhai bridge is completed.
“There will certainly be traffic,” he says. “However, current reasons for visitors in Macau to hop from casino to casino is quite different than Las Vegas, in our view. In Macau, our contacts mostly suggest patrons move from casino to casino in order to change their luck. In Las Vegas, it is about getting a larger and more complete experience, outside of gaming. We see some elements of the Vegas model emerging in Cotai already, which includes foot traffic by some patrons broadening from just their gaming experience, but it will certainly take time.”
Goldstein acknowledges that the distance between the casinos will continue to be an issue.
“Walking from Wynn to the Venetian is going to be a long walk,” he says. “There’s a lot of options for moving people around Cotai. Bussing or light rail, whatever, there’s going to be some solution.”
Govertson believes that pedestrian traffic will increase.
“There will absolutely be a significant amount of foot traffic between the Cotai properties in the future,” he says. “In fact, there is already a large amount of foot traffic every day walking back and forth between the four larger properties on Cotai. This will only continue to grow once the newer properties start coming online. We think that Sands China and Melco Crown are the most obvious beneficiaries of increased foot traffic, as their properties essentially make up the core of the Cotai Strip.”
Competition with the shuttle service will hinder ridership on the light rail system, according to Govertson.
“In a market like Macau, it is tough to compete with something that is free,” he points out. “As such, we believe most customers would still prefer to take the free casino shuttle buses from the various immigration points of entry. It is possible that the light rail system will hold a greater appeal to local residents as a means of going to and from work. That said, we think the light rail will hold higher levels of appeal to get visitors from the primary border gate to the casinos on the Macau peninsula.”
Another challenge will be the division of table games to the new properties. The Macau government has said it will only permit a 3 percent annual growth of the table game numbers over the next 10 years, a level that would not satisfy all the new properties. Although the government says it will be flexible in issuing table-game approvals, there are still some doubts about how this will be accomplished.
“If we look at Cotai development projects Macau Studio City, Galaxy Phase II, MGM, Wynn and SJM, we believe the table cap confines are in line with what (Tourism Secretary) Francis Tam has stated previously with regard to the table cap,” says Bain. “Of course, when you add the Parisian and other potential projects, it can become stretched. Still, there are some projects like the Parisian that may have been gazetted prior to the table cap. Does this mean it is grandfathered in? We believe that is a negotiation.”
Goldstein is uncertain if any amount of tables will be enough, given how the entire market is poised to grow, even outside of the new projects.
“It’s hard to say whether or not there’s enough table games,” he says, “when you consider the dynamics of this market, unlike any other market in the world, of having 1 billion people who have had trouble getting here, because infrastructural improvements are really just beginning. The market is growing so quickly. The Macau of today will be so much bigger in three or four years when you consider the rail improvements currently under way on the mainland, construction of the bridge from Hong Kong and Zhuhai, the enlarged border crossings… It’s increased the business opportunity for those of us in Macau many times over. So are there enough table games? No, there will never be enough if the growth continues, but we’ll do the best we can.”
And Goldstein points out that the VIP market will diminish in importance as Macau grows.
“The story of Macau in the future is not going to be the VIP market; it’s going to be the mass-market visitors,” he explains. “That’s the exciting story with the infrastructure improvements, and that’s what the Cotai Strip is made for. We’ll never see this again in our lifetime.”