July 15, 2008 / 4:55 AM / 10 years ago

Macau casino risk goes beyond octogenarian feud

MACAU/HONG KONG, July 15 (Reuters) - Warring octogenarian siblings are not the only headache for investors as a casino firm with roots in Macau’s lurid past makes its stock market debut this week.

Intense business rivalry, building delays, labour shortages, money laundering, Chinese travel restrictions — the potential risks outlined in SJM Holdings’ (0880.HK) share prospectus — make a lengthy health warning for the company and the industry.

Once hot, stocks related to Macau’s $15 billion gaming market are no longer a one-way bet.

Even U.S. firms Las Vegas Sands (LVS.N) and Wynn Resorts (WYNN.O), which muscled in with slick new casinos after SJM founder Stanley Ho’s monopoly expired in 2002, have seen their share prices more than halved since November.

The odds are particularly stacked against Sociedade de Jogos de Macau (SJM), which will trade on the Hong Kong Stock Exchange on Wednesday, having overcome a last-minute legal challenge by Stanley Ho’s estranged sister Winnie Ho, who owns a stake in its parent company.

“We haven’t invested in Macau-related stocks this year, as the casino industry faces oversupply,” said Lewis Wan, chief investment officer at Pride Investment Group.

SJM’s operating margin has halved to 6 percent in the last three years as high-rollers slipped away to the swanky casinos built by the U.S. operators, which notch up 20 percent margins.

Earnings are projected to grow by just 2 percent in each of the next two years, compared to between 13 percent and 22 percent for rivals.

A “moving elephant”, is how BNP Paribas analyst Chris Zee described SJM in a note to clients.

At least SJM stock looks cheap.

At HK$3.08, the company priced its initial public offering at the bottom of its indicated range and a third less than its fair value, according to CLSA and BNP Paribas, which were both involved in arranging the deal. Deutsche Bank (DBKGn.DE) is the lead underwriter.


SJM pressed ahead with the IPO despite a torrid time for stocks and raised $494 million, half of what it wanted, to help give its famous old casino, the Lisboa, a long-awaited revamp.

The garish Lisboa, where clusters of women in miniskirts whisper to attract passing men, is a relic from an era when gangster gunfights often echoed across the sleepy town, compared to Ho’s plush Grand Lisboa across the road and other new venues.

During a four-decade monopoly, casinos such as the Lisboa helped Stanley Ho build a fortune now worth about $8 billion.

But the 86-year-old tycoon, who claims to have fought off pirates during a voyage to Macau early in his career, has struggled to defend his empire as SJM’s share of gaming revenue dropped to 40 percent from 75 percent three years ago.

The former Portuguese-run enclave, whose gaming revenues overtook those of Las Vegas in late 2006, now has 29 casinos, with more on the way. About a dozen hotel and casino operators are building what they hope will be a family-friendly entertainment hub on the Cotai strip — 4 sq km (1.5 sq miles) of reclaimed land fusing two islands — with most opening by 2010.

The surge in building has caused construction costs to soar and delayed some projects. And the battle to keep croupiers means SJM’s wage bill doubled in two years to $390 million in 2007, when staff numbers grew just a fifth.


Reports that China’s neighbouring Guangdong province has stopped issuing double-entry visas for Macau are a reminder Chinese authorities could turn the tap off at any time. Half of Macau’s 27 million visitors in 2007 crossed from mainland China.

“It has increased the policy risk facing Macau gaming stocks,” said Gabriel Chan, an analyst at Credit Suisse.

A corruption crackdown could provide the motive to close the border. Analysts suspect corrupt Chinese officials shift ill-gotten gains by paying tour operators at home for chips they pick up in Macau.

SJM has set up an anti-money laundering department that tries to spot suspicious gamblers and do background checks on them, but says in its prospectus the Macau government could impose a fine or even revoke its licence if it discovers illegal activity.

But with 85-year-old Winnie Ho around, some form of litigation seems guaranteed. She has launched more than 30 court cases against her brother in recent years, including complaints against the transfer of assets to SJM from its parent firm, STDM.

Winnie Ho, who owns 7.3 percent of STDM, sent her lawyers to argue in Hong Kong’s high court last week that stock market regulators should have turned down the IPO because of the legal uncertainty. She lost but continues her court campaign.

For an IPO story on SJM, double click on [ID:nHKG141160] ($1=7.803 Hong Kong Dollar) (Editing by Anne Marie Roantree and Louise Heavens)

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