Below is the transcript of an interview with Melco Resorts & Entertainment, Lawrence Ho. If you choose to use anything, please attribute to CNBC and Christine Tan.
The interview will play out in CNBC's latest episode of Managing Asia on 25 May 2018, 5.30PM SG/HK (in APAC) and 23.00 BST time (in EMEA).
Christine Tan: So Lawrence, Morpheus is in the final phase of development for City Of Dreams. What's the concept behind this huge inspiration that we're looking at today?
Lawrence Ho: It's a love letter for Macau as we've been very fortunate to operate in Macau, the greatest gaming and entertainment jurisdiction for the last 15 years. We really felt that Macau deserved a landmark and it's an architectural icon for Asia as well and fits in line with the overall theming of the city of dreams which is contemporary luxury.
C: Is this all part of your larger revamp of city of dreams which you're going to re-launch later this year?
L: The City Of Dreams is going to be 9 years old and so we wanted City Of Dreams to feel new in light of these new resorts that have opened up since then so there's a global rebranding campaign that uses Morpheus as the main catalyst and anchor. Morpheus is going to add around 800 rooms to City of Dreams which is a 1,400 rooms but even more importantly it targets the right customer base and for us our customer base, our bread and butter will always be 5-star premium mass and premium luxury customers
C: What exactly is premium mass? We know what VIPs are, we know what mass market is, but what exactly is a premium mass?
L: Well, premium mass is a term, a gaming terminology that Melco created around 5-6 years ago and the mission from the very get-go even from 10,15 years ago was that we wanted to have our own guest database, our customer database.
C: Did you want to move away from the junket operators? Was that the main reason?
L: We've always, that was always the goal even when we did our IPO on Nasdaq back in 2006, I was predicting to investors way back when that there would be a major shift and a transformational event where VIP is going to be less relevant, and mass really targets the growing affluent middle class, people who want to travel, people who want to experience more than just casino gaming. So I was predicting that probably a bit too early back in 2006, but that is happening today and it's the most sought after segment and a lot of our competitors have tried to replicate and copy it over, over the years.
C: How much of your overseas expansion is due to the fact that Macau is facing a tough situation as a result of the Chinese crackdown on corruption?
L: Well the, the goal for the company was always to go global so it wasn't as much related to Chinese policy and the Chinese crackdown. We've always wanted Melco to be an Asian company headquartered in Hong Kong but at the same time have reaches globally in jurisdictions that we can make big bets on. We are very selective in terms of what cities and what countries we go into because part of our DNA is that we don't ever want to commit to a city or a country where we're not doing the best we can. And that's why whether it's in the Philippines or in Cyprus, when we got into Philippines in 2012, we, ourselves and our partner SM Belle Group, we spent over a billion US dollars and at the time people thought you guys are insane, you're committing a billion dollars in 1 of the 4 licenses in Metro Manila. That was crazy at the time.
C: Did you think it was crazy for you at that time?
L: It was a bit, but..
C: It was a bit of a gamble?
L: It was a bit of a gamble, but it's just like everything we do. We like to go for the big plays, I always swing for the fences and I always try to hit the homerun.
C: Well these days, your main focus and priority appears to be in Japan where the government has actually endorsed a bill to legalize casinos in the country. You've established a Japanese subsidiary, opened an office in Tokyo and appointed a local leadership team. What do you think your chances are? Do you think your efforts will pay off?
L: We've spent 12 years lobbying and I'm in Japan, various parts of Japan every other week for the last year. I'm a genuine lover of Japan because and that's from a very young age. The first country I ever visited outside where I was born which was Hong Kong was Tokyo so for me to get a license in Japan it's not just all about business, it's really again fulfilling another dream that I've always had to have a big presence there.
C: So what do you think your chances are?
L: We think we have a good chance because ultimately what Melco stands for, and if you look at our track record of the integrated resorts that we've built, City Of Dreams Macau, Studio City Macau, City Of Dreams Manila and even City Of Dreams Mediterranean, they're all top resorts within the market that they're in and I feel that it's always important to attract tourists to a country, but even more importantly you have to attract the right tourists. On average our guests at our resorts spend 2 times as much at our resort and also stay longer than our competitors across the street or just next to us.
C: So I understand you're looking to build with a local Japanese partner and you've had some discussions. How are talks coming along, any progress?
L: We've met many Japanese corporates in different industries and there's been a lot of companies that can add value, but at the same time we need to wait for the national government because the IR implementation bill has just been submitted to the Diet and so we need to wait for the national government to decide what cities because there are different partners and their strengths are in particular cities. so the talks are still very preliminary at this stage because honestly we know 3 places, we suspect that 2 of those places are going to be mega metropolitan cities and 1 regional and our interest naturally is in the bigger cities, because we want to build the greatest, most amazing, most technologically advanced Integrated Resort ever and only the mega cities have that tourism appeal.
C: So which city are you gunning for?
L: Well I think right now we're looking at various cities because even within the cities and the prefectures, they're competing amongst themselves for the 3 slots that the national government has decided. I think a front runner certainly is Osaka in the Kansai region, I'm sure there's going to be a candidate city in the Kanto region, very likely to be Yokohama or somewhere close to the Tokyo airport but not within Tokyo, and then the regional city is very likely Hokkaido or Nagasaki or even Okinawa.
C: So you're favoring Osaka?
L: We like Osaka or Yokohama, Kansai or Kanto equally and because I think at either one of those places the tourism appeal and the infrastructure is there to enable us to build a 10 billion USD plus resort.
C: So you're talking in the meantime to these local Japanese companies whom you're looking to tie up with, but aren't your competitors also doing the same thing?
L: Well, absolutely. I think for the last few years sometimes visiting Japanese companies is like speed dating because we are literally in the lobby and then we see our competitor come out of the meeting room and then we go in.
C: So what are you doing to win your Japanese partner over?
L: Well, I think, again what we tell them is look at the track record. For whatever reason in the gaming entertainment industry, partnerships never work. If you look at our competitors, Steve Wynn and Okada, Sheldon Adelson and Galaxy, they always end very, very badly in lawsuits, and, and I think we have had a track record of great partnerships um across the board. To begin with in Macau was a partnership between myself and James Packer of Crown. In Philippines, we had a great partner, we continue to have a great partnership with the SM and Belle group and in Cyprus again we had great partners with the CNS group so we work well with people and I think a lot of that is because of my Canadian upbringing, because I'm an easy going, ultra open minded liberal guy.
C: So you're selling the good points, would you consider taking a minority stake in the venture?
L: Well, I think it's really subject to the conditions but I would think that, traditionally when you look at the IR bidding process, the IR developer is the lead, so we're not completely against it but that would not be our preference. So it really depends on the consortium. If there were many members in the consortium and there was no other way for us than to be a minority then we might consider it.
C: Have you done the math? How long will it take for you to recoup your 10 billion dollar investment in Japan?
L: Assuming the whole legislation process goes very smoothly without any hiccups – but in Japan the culture is consensus building so they're still doing a lot of groundwork. There's consensus building at the national level, the prefecture level and the city level with all the key stakeholders, the chambers of commerce, all of which we continue to have dialogue with. So I think the earliest that the bidding can even take place is probably 2020 or 2021, and if you build an Integrated Resort with Japan's dedication to quality and their building methods in terms of perfection, it's probably going to be a.. in Macau we built these great buildings for 3 and a half, 4 years so I think in Japan it's probably going to be 5 or 5 and a half years. So the soonest that an Integrated Resort will open in Japan I think would be in 2025. Usually with these mega buildings the payback is probably 3 to 5 years and I think in Japan it'll be longer.
C: So we're looking at 10 years at least?
L: Well, I wouldn't say 10 years, but definitely longer than your typical Asian development. For instance, Singapore had probably a payback of 4 years and I think Japan will be longer but the potential is so great that it's worth the wait.
C: You've said openly that if you were to win a Japan license, you would actually move your headquarters to Japan. Now that's a strong commitment to make, are you serious about it?
L: I think I would certainly move to Japan, and I've already spoken to my wife, she loves Japan.
C: You've gotten her consensus?
L: Yes, she loves Japan and she's happy to move tomorrow and so I would definitely move there to build up the resort and to make sure that it's operating to the very highest quality.
C: Right now the bulk of your revenue still comes from Macau. You actually own and operate about 3% of resorts here in the city. Given the amount of money that you spend in Japan and given the same amount of money that you spend in Japan as you did in Macau does it have the potential to overtake Macau in terms of revenues and earnings one day?
L: No, I think at the end of the day from a revenue standpoint, Macau will always be the highest grossing gaming market anywhere globally and that's why we're extremely grateful. Part of the reason why we built Morpheus as well is really as a thank you for the support that we've gotten from China and also from Macau. So I don't think Japan will ever be at the same level as Macau in terms of revenue, but we'll have to see. I think there's a license rebidding renewal process that will happen in Macau and so we really need to see what the tax rate, or what are the renewal/rebidding um conditions in due course.
C: But you still expect Macau to be the bulk of the revenues?
L: Absolutely. Macau at the peak in 2013 was a 45B USD market and I think in that same year Las Vegas was maybe 6 billion, so Macau was 7 times Las Vegas and even today Macau is probably 5-6 times the size of Las Vegas which is the next biggest market
C: The opening of Morpheus also coincides with a pickup in Macau's gaming revenue after what's been a tough few years. What's your outlook like now? Is a meaningful recovery in place?
L: Absolutely, we've had 20, 21 straight months of growth and I think at the same time when the Hong Kong Zhuhai Macau Bridge opens up it will be a transformational event for Macau so I think that the future is very bright for Macau and also for the entire region.
C: Your Macau license actually expires sometime between 2020 and 2022. Are you confident of an extension?
L: We're very confident. I think we have done more for Macau than any of our competitors. We didn't have to spend 10 billion dollars in Macau but we did, and in terms of listening to them, in terms of um non-gaming diversification, I think even when the Macau government had a midterm review back 2 or 3 years ago just to see the state of things in the market, if we weren't the top, top grader, we were indeed the first or second. So we're very proud of that fact and we continue to fine-tune our craft.
C: Last year you ended your decade long relationship with Australia's James Packer. What happened? Was there a big disagreement between the both of you?
L: Not at all, James and I are still very, very good friends. We consider ourselves brothers and I think it was just at a point in in time where James wanted to focus on his domestic Australian assets and I wanted to continue to grow so it was very happy and amicable unlike the other gaming partnership dissolving that we see in the industry. Ours was, there was no yelling or anything it was just very happy, and to be honest with James I wouldn't hesitate for a second to partner with him again on another project.
C: So if you had kept that partnership going, he would have been interested in Japan?
L: We were, we were definitely doing Japan together. We were in Japan a lot having meetings together.
C: So just to be clear, the conviction of his staff in China had nothing to do with the break up?
L: Well, it's hard for me to say what caused his change of view on China. James was, and I feel bad for James because he was such a huge supporter of China. He spoke so highly of it for an Australian, for a foreigner. He spoke very highly of the future of the Chinese economy and the relationships; he was trying to bridge the relationship between Australia and China. So I felt really bad for him and I don't know the details of what had happened with his local operating teams because we ran our marketing teams separately, but it could have had an impact. I honestly don't know but I think James with what was going on, and Melco wasn't the only asset that he divested. He divested his Hollywood assets to really focus on bringing down debt, and focusing on his domestic assets.
C: Last year in 2017, Melco posted a strong year in terms of growth, in terms of revenue, in terms of earnings. What's your outlook for the company this year? How do you expect to do?
L: Of course, Melco and the whole gaming industry had 2 very tough years between 2015 and 2016 when China had its anti-extravagance, anti-corruption campaign.
C: Painful year?
L: It was a very painful year, but at the same time we always look at things, from a glass half full or half empty, we'll always look at half full and I think that allowed us to be a lot more efficient, that got us to really focus on Kaizen, and we looked at everything from our purchasing practices to our labor practices.
C: So you were reinventing yourselves?
L: We reinvented ourselves, we took out a lot of costs out from the business but at the same time we didn't affect the ultimate guest experience and that was the most important thing.
C: So last year 2017 was a good year for you in terms of earnings and in terms of revenues, how do you expect to do this year? Will it be a better year for you?
L: It will, the mix of EBITDA has improved drastically over the last few years because as I mentioned earlier VIP used to account for 70% of the market and Mass was 30, but our EBITDA margin on VIP is 10% and our mass margin is 40% so its 4 times, and given the makeshift change in the business model, our earnings are much healthier now than it was previously. And what's even better is the fact that we've always been one of the least reliant companies on the VIP or junket business and so we control our own destiny if we continue to treat our guests well.
C: That's your payback?
L: Yes, as long as we continue to exceed their expectations, give them amazing cool products like Morpheus, a cool gaming experience and cool attractions, then I think we'll continue to do well.
C: Any plans to expand further in the Philippines?
L: We're looking at potentially expanding. I think there is contiguous land around where our resort is so we are looking at expanding together with our Philippines partner but again, still early days.
C: Your Father is well known casino mogul, he's 96 years old, Stanley Ho, he founded SJM Holdings um he was the one that held a 3 decade monopoly here in Macau. What's it like to be his eldest Son trying to build your own gambling empire?
L: It's been fun for me because my colleagues and I, we've really built this thing from the ground up.
C: In the last 10, 12 years looking back, any mistakes, any lessons learned along the way?
L: Well, tons, tons of mistakes.
C: Name me 1
L: Well, I think it was one of the coolest mistakes that we ever made and I had a lot of fun doing it but it was when we spent 75 million dollars doing a short film to promote the City Of Dreams Manila, Studio City Macau's opening and also what we were going to do in Japan. We had the coolest director in Martin Scorsese, Leo DiCaprio, Brad Pitt, and Robert DeNiro so it was a really cool project but for 75 million USD we spent more money on that than Scorsese's movie about casinos.
C: So on hindsight?
L: It was still really cool. Hahaha.
C: Well, building your own gambling empire yourself has also meant that you had to compete with your very own father, SJM, not to mention your sister who runs MGM China. What's it like to compete with family? Do things ever get personal?
L: No, not really because we all do our own thing. It's an ultra-competitive industry and the key is we just focus on our own ventures and we have great teams that that help us, but at the dinner table when we do have family gatherings it's nothing but laughs
C: What sort of relationship do you have with your Father? Has he said anything to you about your achievements at Melco?
L: Well, my father had a very serious accident around 9 years ago and so I think he's taking it very easy in the last 9 years. The bulk of my building for City Of Dreams, Studio City Manila, Cyprus or even our venture in Russia was post his accident so we haven't had a lot of dialogue in terms of what I built. But I think it's very similar to when he got into the industry in the 60s and he held the monopoly for 40 years, he revolutionized the gaming industry in Macau. Before he got involved it was even more archaic than it was, and I think I'm hoping to do that with this industry as well.
C: You want to build on his legacy?
L: I want to build my own legacy. We want to build the coolest, most amazing, most award winning resorts not just right now but 20 years from now, 30 years from now, I still want us to be the coolest operator out there.
C: But did you get the sense that he was supportive of what you were doing?
L: Uh, I think so. Again, I was very lucky not to have worked in any of his companies. I think after school I came back and I joined an investment bank during the IT bubble and I learned about corporate finance and to be honest to get Melco to this stage involved a lot of financial engineering, not just borrowing from the banks. Every single equity transaction derivative you can think of, we've done and so getting Melco to this stage was a result of that.
C: Your father is going to step down as Chairman of SJM next month and there are concerns of a power struggle within his company. Now I know you're young, but any lessons there for you in terms of succession planning that you can take away for yourself and Melco?
L: Of course it's very important to have succession planning and I think it's even easier if you have only 1 child like me.
C: Not 17?
L: Not 17, but at the same time I think for me I come from North America so I'm very open minded because Melco is a listed company, the parent company is listed in Hong Kong, the main operating company is listed on Nasdaq and so we need to look out for all of our shareholders and stakeholders including our banks, bondholders and it needs to operate like a genuine company with the highest regards for corporate governance and the best practices so I think for me if my daughter doesn't want to get into the business it's totally fine with me. I think one day there'll be a management team, a young, hungry, innovative and creative management team that can continue to take this thing forward as long as it has the philosophy that we've built so I'm pretty open-minded.
C: The power struggle and feud within your family made big headlines in 2011, were you sad things became so public?
L: Well, I stayed out of it. I think that whenever there's so many people involved and my view was that..
C: Must be used to it?
L: No, I'm not used to it because I stay out of it. On top of being very open minded I'm kind of a straight shooter and so I consider bickering just a waste of time and crappy. So I totally stayed out of that and I'm glad I did.
C: You are 41 years old, you left investment banking to get into gaming in 2003, operating under the license of your father before you got your very own in 2006. You now run 3 casino resorts here in Macau, one in the Philippines, and with gaming operations also in Cyprus. How would you describe your leadership and your management style? What is Lawrence Ho like as the boss? 115139
L: Well, I like to think that I want to surround myself with the best people, people that are much smarter than me and I think that's an important component because I consider myself hardworking, I think I have an eye for certain style but other than that I like to bring on more and more people that can supplement the team and have better and new ideas and that's what the company was built upon. We want the greatest ideas, the greatest concept and then we need to execute them properly. So I would say I enable my colleagues and we work as a team, I enable my colleagues to challenge themselves and do things that are super cool.
C: And finally, since I last interviewed you more than 10 years ago, you're still as energetic as ever. So just between you and me, how many casino resorts would you be having in say 10 years under Melco?
L: I don't know, for us what's more important is quality over quantity so I think 1 Japan or 1 Macau trumps 10 Koreas or 10 Cambodias. For us it's always going to be, we don't have the most hotel rooms but we have the best hotel rooms. We have the most attractions but we just want to make sure everything we do is the absolute best.
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