Melco Resorts & Entertainment Ltd (MLCO) 2009 Q2 法說會逐字稿

Good morning, and thank you for participating in the second quarter 2009 earnings conference call of Melco Crown Entertainment Limited. At this time, all participants are in a listen-only mode. After the call, we will conduct a question-and-answer session. Today's conference is being recorded. I would now like to turn the call over to Simon Dewhurst, Executive Vice President and Chief Financial Officer of Melco Crown Entertainment Limited. Please proceed.

Thanks and good morning. I'm here in Hong Kong with Lawrence and Ted. Constance and Greg have also joined us via a conference call link up with Macau.

Before we get started, please note that today's discussion may contain forward-looking statements made under the Safe Harbor provision of Federal Securities laws and actual results could differ from anticipated results.

Prepared comments are going to be brief tonight to leave plenty of time for Q and A. We opened City of Dreams on time and on budget during the current reporting quarter. We've already updated the market on the sequential improvements in operating volumes of City of Dreams from June to July, up by more than 30% on both drop and roll.

And we've also already reported that our hold rates across both properties was a blended 2.94% in July. This good hold has continued into August. I don't encourage people to look in just a few days of data. But for those of you who like to track these things on a day-to-day basis, our overall market share into August has also continued to increase.

If we normalize rolling chip hold to 2.85% during the reporting quarter, adjusted EBITDA at Altira would have been $18 million. Altira's second quarter results included a one-time incremental provision for bad debt of approximately $4 million. And reversing this gets to a like-for-like sequential adjusted EBITDA from Q1 to Q2 which is slightly above flat.

I now like to turn the call over to Lawrence.

Thank you, Simon. Since the fourth quarter call last year, I have been saying that the worst is definitely behind us in Macau. I think the Macau market will continue to strengthen and the second half of this year will be meaningfully better than the first half.

The market's return to growth in July of this year is in line with the trends that we've been seeing of returning strength in gaming volume since the beginning of the year. High quality supply leads to growth. And I think we have shown that City of Dreams has helped to stimulate renewed interest in the market in the past two months. We made a meaningful contribution towards the market's return to growth in July.

We are confident in China's ability to continue to grow faster than any other major economy in the world. We are very fortunate to have China as the engine of economic growth anticipation in Macau as compared with pretty much all other gaming markets around the world.

I take great pride in our delivery of City of Dreams on time and on budget. Greg and his team have done a good job, delivering a very smooth opening. We are now executing on all of our operating and marketing progress. And we are very pleased with how this is helping to improve the performance of the property just a few weeks after opening.

City of Dreams opened with an efficient cost structure. And we will of course be able to find additional ways to run the property more efficiently, just as we did at Altira. Remember that we moved about 800 employees to City of Dreams from Altira. This was done very smoothly, and has helped deliver tangible cost efficiencies at both properties.

The feedback from guests who have visited City of Dreams has been overwhelmingly positive. And this is both satisfying. We will open Grand Hyatt by the end of September, as this is a very important milestone as currently we do not have enough rooms for all of our guests at City of Dreams.

And finally, I want to congratulate Dr. Chui Sai On on his recent election as Chief Executive-elect of Macau. I've known Dr. Chui for years and I can tell you that Macau is at strong and capable hands. I look forward to working with him and his new administration to continue Macau's balanced growth as it solidifies its position as the leading leisure destination in Asia, while at the same time improving the living standards of local Macau people.

We've taken the lead on creating job opportunities and career enhancement opportunities for the people of Macau, and we will continue to work with Dr. Chui and his government in these efforts.

I will now hand the call back to Simon for some final comments and Q and A.

Just a couple of comments from me before we get into Q and A. First in regards to Altira, our strategy of differentiating it from City of Dreams, there has been no noticeable cannibalization. In July, we did nearly $200 million a day of rolling chip volume across both properties. That's roughly 22.5% of the whole rolling chip revenue market in Macau.

Altira roll volumes were up 15% in July as compared with the prior month. Now, clearly it's early days. But we believe we've delivered a strategy that has allowed us to open a major integrated resort three minutes away from Altira Macau without meaningfully disrupting its business.

Second, with the opening of City of Dreams we've transitioned from a development company to one focused almost exclusively on operations. Our management team is not distracted by fundamental capital structure changes, or of large-scale development projects in multiple markets, but 100% focused on the execution of our business plan, which is to generate maximum EBITDA from our existing property.

We will continue to drive business volume across our three business units and find ways to operate these three units more effectively.

Excluding gaming tax and commissions, our total operating expenditure across all our business units, and including our corporate head office and centralized costs adds up to about $1.3 million a day. We will remain in the process of examining synergies between our business units. And we expect to find further cost savings as we move forward. But please note we started with a lean cost structure in the first place, and this is an important differentiator.

Third, as we said on previous calls our balance sheet is strong, one of the best in the gaming business. As of the end of the second quarter of 2009, we have approximately $660 million in cash.

With the exception of the Grand Hyatt, which opens at the end of the current quarter, construction and CapEx of phase two of City of Dreams is essentially complete. We expect to outflow approximately $190 million on construction activities and in closing out final accounts on the site in the third quarter.

Now, as I have done in past calls, I'll give you some other guidance on non-operating line items for the third quarter of 2009. Depreciation and amortization cost in the third quarter 2009 is expected to be in the range of $75 million to $80 million. Net interest expense in the third quarter of 2009 is expected to be approximately $12 million to $14 million. Pre-opening expenses associated entirely with the opening of the Grand Hyatt are projected to be roughly $10 million.

And with that, let's go to the Q and A. And as a quick reminder, Ted, Greg, and Constance are also on the call with Lawrence and me. So please direct your questions where you see fit. Operator, I'll give it you. Thanks.

Thank you. (Operator Instructions) Your first question comes from the line of Larry Klatzkin with [Chapdelaine]. Please proceed.

Hey guys. Lawrence, I hope your father is okay.

Thank you for that, Larry.

And I do wish I had been at that first month of the -- of your opening of City of Dreams. I might have actually gotten lucky at the table for once. Sorry.

The things on just Macau, one, is there any chance of getting someone like Amax or such into City of Dreams, or you think you don't need that on the high roller side at -- in Cotai?

I think Larry -- it's Lawrence here. As we have guided in previous calls, I think for us the key is not to cannibalize the business between City of Dreams and Altira. And I'm happy to say that if you see our results in the VIP volume in June and then we really ramp up the program at the end of June when we launched the [VA] Club. And into July we've seen really strong volumes even with the 1.25% Cotai cap that we have imposed on ourselves.

So I think at this juncture it's great that while our July volumes in Cotai has been extremely strong, Altira also showed significant strength and growth on a month-on-month basis. So -- and we've always said that we have not opened all of our VIP rooms at City of Dreams. So we do have additional capacity going into the Grand Hyatt openings.

But at this point in time, I think that the strategy of not trying to cannibalize the two properties is working very, very well. So I think -- that's our current view.

Okay. That's fine. As far as this cap, I mean the Gaming Association agreed on caps, first you and LVS, and then the whole group. But now it sounds like the government is going to take over control of this. Is that true? And what would it mean?

Then two, is the fine of $62,000 really enough to make any difference on this at all to anyone anyway?

Larry, I think -- to be honest, I think the formation of the Gaming Association in amounts of six casino operators has been a huge success in Macau, because on top of this commission cap issue, I think it is showing that the six operators are rationally and working in the best interest of the whole industry, and more importantly of our respective shareholders. So I think gone are the days where ego took over and people are competing neck-to-neck on everything else.

On the commission cap issue, yes, there was a -- there is news that came out in Macau today that the executive committee of the government has approved that directive. And I guess there is still going to be a process that goes on about gazetting and eventually waiting for the financial secretary to really formalize it. And that could happen within the next month, or it could happen in the next few months. But I think, again, all in all it's a great thing for Macau, and it's a great thing for our businesses, because at the end of the day City of Dreams and Cotai is already one of the lowest payer of commission.

And Larry, this is Simon. I'm going to add something in that. I think we hear in this analysis a lot about looking at the disincentive associated with the fine. And I think that the focus is completely wrong. You should be looking at the incentive to all of the operators or operating in tune with a direction that we have received from the government, and also operating in line with something that's beneficial to us, and our businesses, and our shareholders.

So the reason why the cap will be successful is because there is plenty of incentive for all operators to make sure that that's the case. It's not because the disincentive is too great for us to do anything different. So that's how I would stir it.

Well, and I think, Larry, just to add on that as well, I think -- some people -- I read some notes today saying that there is junket licenses will not be suspended or terminated at all for breaches. That is not what the government has been telling us. So I think on -- in addition to monetary fine, there are additional consequences. And at the end of the day when you look at the six operators, we're all list of companies in various jurisdictions. And this is the law. Even though -- I think if you keep violating the law, in the long-run, of course the government will have other things that will punish you.

All right. One thing, LVS said in their call that if the commission cap was in effect today, it would have probably gathered them a -- probably $40 million more of EBITDA. And I know you guys may not have really sat down and calculated, but do you have any feel if this is successful what it may bring to your bottom line, what it's costing you guys these days, is it over 1.25?

You're absolutely right. We haven't sat down and number-crunched what the effect of the commission cap will be. Obviously, as Lawrence has already explained, we opened City of Dreams at the level that we believe the cap is going to be at. So I don't think that there is any material change there. In terms of what it does at Altira, it's advantageous to Altira, and it will depend on when it comes in and the terms that are applied to it. And we're looking forward to the upside that will be associated with it.

All right. And then last question. You guys -- now that City of Dreams opened, are you open to new jurisdictions like Taiwan or anything? Is that something that would be on your bailiwick if it became opportunistic?

Well, Larry, I think as we've said before, for the next 12, 18 months I think Melco Crown Entertainment as a company is solely focused on making sure that all of our respective business units, Altira, City of Dreams, and Mocha, are running at optimum levels.

As Simon said early on, I'm sure we can improve on our performance, both from a revenue and more importantly from a cost standpoint. But having said that, having one of the most conservative balance sheets of gaming companies out there, does give us the flexibility to look at other jurisdictions. And it is also no secret that we've been to Taiwan and Japan many times in the past few years. So we'll continue to look into that.

All right. Well, thanks guys.

Thanks, Larry.

Thanks, Larry.

Your next question comes from the line of [Dominique Mielle Johnson] with Citi Investment Research. Please proceed.

Hi guys. And hi, Lawrence, this is Dominique Mielle Johnson from Citi Investment Research. My question really is on what's going on in terms of the shift from the Peninsula to Cotai, and in particular with Venetian and yourself (inaudible) you've mentioned some collaboration already. I was wondering if there are any other proposals that you are thinking about going forward. Maybe you could detail a little bit on that.

And then perhaps one for Greg, on the mass product which is obviously picking up well at the City of Dreams, are there any other measures that you're looking, or what are you going to be doing to ensure that that product continues to do well?

Greg, you want to take the second question first?

Yes, sure. Thanks Lawrence. Probably to lead into that response, we've been particularly pleased with the opening execution of the property, and the delivery of our service proposition today. So I think that the master brain configuration of what City of Dreams is about has been launched effectively into the market. As that awareness is growing through a number of different mediums, for example advertising, PR, as well as word-of-mouth strategy, we've seen a consistent increase in the uptake, and conversion, and visitation to the property into casino activity which is very pleasing, and as we expected, and very much in line with some of our -- particularly our advertising and PR initiatives as well.

Now that we're into nine weeks of operation, we've got a fairly significant amount of data on the casino performance to be able to more accurately assess performance of individual product, areas of customer flow through the property, and how we can position and optimize the business moving forward. So I think like many properties we've seen very good growth occurring through from month one to month two.

Now with that data available, areas with regards to layouts, product mix, and productivity of labor as well are all areas both on the revenue side as well as cost control initiatives as well which we'll really start to push quite aggressively now to increase the earnings.

So I think our focus now is really on detailed analysis, doing an incredible amount of qualitative exit research as well as to just get a real understanding of the reaction to the property from our core markets, which are much more important as being particularly positive. So I think using that data now to particularly look at product enhancement and productivity of our inbound mechanisms, particularly buzzing as well, which has gone well, are areas that we'll focus on.

This is Simon, hi Dominique. The other critical piece of that of course is adding more rooms, and that happens at the end of September, and that's really going to be the key driver in terms of what we see on mass side.

The -- in terms of your first question and really sort of collaboration in Cotai, Cotai is -- and I think that all of the operators are slowly moving to the future centre of gravity in Macau. We're delighted to have City of Dreams front and centre in that, and we're cheering on our fellow concession holders to sort out their funding issues and get their IPOs done so that we can see more critical masses in Cotai in the future, and that will just drive that story faster.

So a very bright future for Cotai and it's going to come from increasing volume supply in the market over the next five years.

And Simon I think the Cotai proposition as a destination is also supported from a governmental perspective as well. So we've had a range of meetings talking about the positioning of Cotai as a distinct proposition for broader entertainment by casino and non-gaming activities as well.

So apart from speaking with operators in the region, there is certainly a distinct governmental interest as well, which is very, very positive.

And Greg, just on that. Could you just maybe give the split or the feedback that you've received from the Chinese since this is clearly the key to driving your mass product? Have you got any specific anecdotes there, or numbers to give us?

We won't be really seeing any particular numbers, but suffice it to say that the core inbound markets to property far from Hong Kong and mainland China who've shown a good repositioning in terms of the broad demographic split from month one to month two.

So particularly the Southern China is market being driven by strong word of mouth and awareness as we've pushed some tactical advertising in those areas. So we've seen a good uptake, still see some growth to occur in those core markets moving forward, particularly Southern China as we progress realistically through the next couple of months, and then into some of the more seasonally highlighted quarters as well commencing in October.

Okay, many thanks. Maybe you just kind of just touched on it, but I know it's early in the month first. But is there any chance you can give an update on the first few days in the month, what have we seen in terms of trends?

Well, I -- as I say, I caution anybody to look at the first few days worth of data in any marketplace, and so I say that again. As we look through the first four or five days worth of data in the marketplace, we're happy that we're continuing to build on the market share growth that we saw in July over June. That continues into August, but be careful with daily data in this marketplace --

I totally agree with Simon. It's Lawrence. I totally agree with Simon, because at the end of the day there is a lot whole percentages that plays into it, but we have -- if you look at the first few days, we have grown from July, we're actually within less than 2% of the market leader in August, so be that as it may.

Okay, many thanks.

Thank you.

Your next question comes from the line of David Bain with Sterne, Agee. Please proceed.

Great, thanks. Lawrence, I guess this question is for you, it seems as if you know the incoming Macau chief fairly well. Can you give us a sense as to some of the major business issues he could confront like visas, taxes and through that knowing he said there won't be any major policy changes. But it seems it might be interesting to get your take as to if all the issues are on the table.

Well, I think from Dr. Chui, before he was the chief executive-elect, he was the secretary for culture and tourism. So naturally he understands very well. And the fact that he went to school in the United States, he has a master and Ph.D., and he also understands very well that at the heart of it, Macau industries and the whole economy and the well being of all Macau people really relies on its anchor industry, which is tourism, which is also -- at the heart of tourism is gaming in Macau.

So I think from that standpoint it's very comforting for business owners and then also for big investors like us that the current policy of really using our -- the anchored industry to drive the economy will continue.

I think obviously when Dr. Chui takes over -- if you listen to the speech that he made after he was elected, there was a lot of emphasis on the dynamism -- how dynamic China is, and how Macau needs to be even closer to China. So I think from our standpoint, China -- Mainland China is such a huge market for us. And I think the policies, if they -- if he -- the policies that he can implement with the -- with conjunction to Mainland China will naturally be very positive.

Above visa restrictions or opening up further of the individual traveler schemes, I'm sure that over the long haul, it's -- this is definitely going to be in the works. And what the timing may be, I think the 10th anniversary of the handover, which is happening on December 20th is a crucial date, because the senior mainland leadership is coming into Macau. And I think the -- our guess is that obviously he might be bearing gifts, but we -- that's our speculation.

So I think, all in all, Dr. Chui with his new administration I think can probably restart a lot of the infrastructure projects and really get -- just get things moving in Macau.

Okay, great. And in terms of swine flu, can you give us a sense as to the magnitude of the impact in July, or actually maybe even June relative to July? I know there was positive data for July. So does that mean things are getting better or just they would have been stronger in July had we not had the --?

Yes. Hi, this is Simon. It's very, very difficult to start trying to draw that sort of causality. The reality is that the peak period of concern around H1N1 was in April and May. That was the time when you had people quarantined in a hotel in Hong Kong, and that caused people to have real concerns.

Where did it impact? Well, we saw it in the visitation numbers. Look at May visitation numbers into Macau, and they dropped 15%, 16%, 17% over what you saw. It carried on through into June, July, year-on-year result at the revenue market. You can see that the concerns around H1N1 are dissipating away as people realize at this point in time that it is a form of influenza that is pretty mild, so that's where we are.

Okay, great. Just a final one. The commission cap, just back to that, I know Altira, obviously that's going to boost margins. But can you give us a sense as to how that works with the relationship with AMA? I guess what I'm looking for is how do we view potential market share moods? Not just margins, with the leveling the playing field across all. And then your relationship with AMA makes the commissions to the junkets, I guess, even a tab lower.

Yes, this is Simon. You had me surprised, we're not going to discuss any specific details of what we think it does with the relationship with AMA. I don't think it necessarily moves market shares. I think what it does is it improves bottom line for all operators. It's as simple as that. So that's how I would look at it.

Okay, great. Thanks guys.

Thank a lot.

Thank you.

Your next question comes from the line of Carlo Santarelli with JPMorgan. Please proceed.

Hey guys, good morning.

Good morning, Carlo.

Okay. I was just -- I was wondering, since City of Dreams, since you guys opened that, obviously things have ramped up nicely here in July. And I was wondering maybe what you guys were seeing in terms of competitive response from some of your other competitors, SJM, WYNN, LVS, in terms of promotions, marketing, any of those things.

Greg, you want to take that?

Yes, sure.

Okay.

As a generalized response, we haven't seen, I would say, a dramatic increase in tactical promotion across the market. It's something we track fairly closely. Obviously the competitive nature of environment is always relatively high. But we've seen a fairly consistent approach. And nothing too dramatic from the competition apart from obviously a fair amount of representation at City of Dreams from the competition, just getting a sense for our product and that's how they see us fitting into the market.

Obviously, at the border gates as well, it's an area of always intense activity as well. We think we have executed our inbound buzzing as the newest player into the market, particularly well right from a brand perspective, and also reaching some very strong utilization numbers into our buzzing.

It's right to say, isn't it Greg? That was competitive before we opened, and it's competitive after we opened. So it's not like everyone has been asleep at the wheel and suddenly decided to start competing.

Yeah, I think that's the right way to describe it, Simon, I would agree.

Great, thanks --

And I think that the other related point which I think is really important to make, there is a school of thought out there propagated by some people that all of the operators are simply going to compete their own margins away in the mass market, and that everyone is out there just trying to buy business.

We don't -- we haven't come into the market buying business at City of Dreams. We've come into the market with the right products. And we're using that in order to build that market share. And so if you're coming into the market, and you are competing with products and with service, you're not going to see a response which is in the form of margin erosion, which is what other people think -- what some people think is going to happen.

We're not seeing any evidence of that right now. And I don't expect that we'll see any evidence of that as we run through to the end of the year.

Understood. And if I could just ask one follow up. When it comes to, obviously, your margins in -- especially in the VIP business, there is obviously tremendous sensitivity to the commissions, and with the new commission cap being instituted, is there a sense you guys can give us as to what your mix between direct and VIP maybe is at City of Dreams at present?

Well, margin is sensitive to volatility at hold rather to commission.

Sure.

Commissions are actually a very stable thing indeed. The -- and the volatility is the volatility, and you just have to live with it. At City of Dreams, we've got a -- we've had some -- the day we first opened we had a very healthy share of direct customer in as a component of our rolling chip market season. It's been in the order of 20% to 25% of our mix. And we would anticipate that that will continue to be the case.

But it's a lot lower at Altira. Altira has a very different model where it's almost entirely driven by the aggregate that is AMA and the outsourced credit that they put into our business model.

Great. Thanks Simon. Thank you guys.

Thanks.

Your next question comes from the line of Cameron McKnight with Buckingham. Please proceed.

Good evening guys. How are you?

Hi, Cameron.

Just a couple of question if I may. What was operating cash flow in the quarter?

Go on to your next question.

Sorry, Simon you've broke up?

Yes. You go on to your next question, and I'll answer your first in a minute.

Okay. Just wondering how much availability you've got under the credit agreement.

We've got $50 million on the revolver that we've not drawn and we have no intention of drawing.

Okay, cool. And, yes, that's it for me.

All right. Well, I'll answer your question before the end of the call.

Okay, thanks.

Okay. Next caller, please.

Your next question comes from the line of [Greg Shepherd] with [CBA]. Please proceed.

Hi guys. Just a question. Is it possible to actually just give us your in-commission rates of City of Dreams?

Yes, I think that -- I think it's well known. It's all in at 1.25%.

Sorry, it --

Greg, are you referring to blended between junkets and --?

Yes, exactly, exactly.

Okay, sorry.

Now -- and is that possibly -- is it possible to maintain the distinction between the two models of the two casinos forever, or have you found any evidence that you'll be able to maintain the difference in the first couple of months?

Well, Greg, it's Lawrence here. I think so far in the first couple of months and also in the first part of August. The trend is -- for us is extremely positive, because most properties in Macau derive probably 90% -- almost 85% 90% of their VIP or rolling chip business from junkets.

But as a testament to how wonderful City of Dreams is than -- it's probably one of the -- big surprises for me is how much people love the design and absolutely love the service. So we actually have a much relatively higher ratio of premium direct players versus junkets, which as you know work perfectly for us, because our motto of not trying to cannibalize Altira and having the two properties really focus on their own market segment even on the VIP non-rolling chip -- rolling chip segment.

So I think all-in-all the trend is positive, and we just don't see another product that is pretty much similar to City of Dreams in Macau, which is really a new generation integrated resort.

Now, that's good. And should we take any -- is there anything in the small change in number of mass market (inaudible) between June and July, or is that your scheduling, or was that actually a movement between the two deliberate?

Greg.

With City of Dreams, we've done few minor changes of layout, which was some early approach to reaction and understanding of what was happening in terms of demand. So I wouldn't read too much into that at this point. That was just an initial review of performance. We think the numbers is pretty much stabilized across the mass floor at this stage.

And as I referred to before, now that we've got a pretty good sample of understanding of performance, we'll obviously review in terms of optimizing type of performance as well as productivity side from a [labor] perspective, so relatively early days. So I wouldn't expect too many dramatic changes.

Thanks guys.

And we published average tables in the --

Sure.

Those change around happened in July. We had a few tables come out while it was worked out.

Yes.

Come back (inaudible). And by the end of the month you back up to the absolute number.

All righty, thanks very much.

I'm just going to answer the cash flow question for the -- in broad terms for the second quarter. EBITDA is as good as here as you're going to get in terms of cash flow in our sort of business. If we held normally, we would had $15 million of EBITDA across the quarter. We actually had negative 24. So the impact of very low hold in our business at the EBITDA level lines was, it was with a hit of about $40 million over what you would otherwise normally have seen from a cash flow perspective.

We had $60 million of pre-opening expenses, that is real expense going out, but it's one-off. So that's cash flow in the quarter. And then we had about $35 million of cash flowed into the business, which were the deposits that came in, the working capital into City of Dreams by the end of the quarter in order to support the operations that were in there. So that's kind of an overlay picture, if you like, as to how cash flows worked across the quarter.

Your next question comes from the line of Grant Chum with UBS. Please proceed.

Good evening, Lawrence. And just a couple of questions, first on the mass market. You mentioned in July the drop went up by 33% to about $130 million. Can you give us a sense of how the average daily drop progressed during the month and into early August?

And the second part of the question on mass market is, your hold in June was 16.4%. What was that number like in July? And also I noticed that -- I mean, a number of the larger mass casinos in Macau generally they get up to 19%, 20% of hold on the mass drop. So I wonder if you could give us any thoughts on whether your number might move up in time or how you would move that number up.

You're fading out at the end there, Grant, but I think I've got the gist of it. It's Simon here.

We're required to report quarterly. We've been giving numbers monthly. I don't think that we're going to get into details of providing it on a weekly basis.

But suffice to say that the improvement that we've seen in drop is just sequentially week to week to week. Across the first eight weeks that we've given a view to the market on is just improved.

And that's all the reasons that Greg has already spoken to on the call earlier on. So it's not been a lump sum start. There's just been a very steady improvement in the overall volume metrics of the property.

But in terms of hold, our hold in July was just a little bit less than 16%. We were just above it in June. Just a little bit below it in July.

We agree with you, the mass hold over time in any property will migrate northwards. And it will do that for a number of reasons. It will do it because over time, and certainly with something like the City of Dreams that you build your roof product, you will get people to stay in the property longer.

Remember the denominator on drop is the buy in. So if somebody buys in and then sits at the table for three hours versus somebody who buys in and sits there for one hour, the guy for three hours may be no more lucky or unlucky. But he's going to generate a higher hold percentage. And so that's just statistics.

So as you build length of player presence in the building, which is a loyalty thing, it's a habit thing, it's a rooms-upstairs thing, you will see that moving from 16% to 17% to 18%. And it can get as high as 20%, 21% for the really well operated property.

We would expect exactly the same thing to happen at City of Dreams. By the way, it takes three, four quarters or three or four months time [results].

And thanks for that, Simon. And on Altira, the bad debts write-off in Q2, does that relate to Altira's fixed junket operator business?

No, absolutely not. The -- you know well that we hired a direct VIP marketing team in the market late at the end of last year and that we have now built a substantial VIP marketing network across the region. And certainly through the first couple of quarters of this year, prior to City of Dreams being open, we were generating a lot of direct player demand from that.

And so that caused for our direct volumes at Altira, which is really a junket supported business model with a small amount of specific direct player custom. And that grew up. And with that, so you move into an arena where you could pick up some doubtful debts that you're providing credit.

We don't provide credit in the writing that runs through the junket side of things. We've outsourced it. That's the AMA model. So this is -- it's actually in relation to just a couple of players. We're being prudent. We know what's going on in the market outside. Not everybody is emerging from the recession in the same way that Macau as a gaming market is emerging from the recession. So we're just being sensible.

Okay, thanks. Thanks very much.

Your next question comes from the line of Praveen Choudary with Morgan Stanley. Please proceed.

Thanks guys. I have two quick questions. First one is with the advent of operators' association, do you expect any pressure on gaming tax in Macau, again, considering that in Q1 2010, you will have Singapore coming with a very low tax? And what's the impact you expect in Macau?

And the second question I had was for Simon. What will be the CapEx number for phase three, which include theater? Thank you very much.

Hi, it's Lawrence here. On the first question, I think the association, the gaming association, as I said earlier on, created a lot of positives for the whole industry. And, of course, Macau being the largest gaming center, has the highest tax rate among the major jurisdictions.

With the opening of Singapore early next year and potentially other markets such as Taiwan, naturally I think the government and the association have had some casual discussions on this. And I think thankfully Dr. Chui on being elected also talked about the fact that he is going to study with his administration the potential impact of lowering taxes in Macau.

So for those who don't know, the tax rate in Macau is effectively 35% plus, plus another 4% for social contribution. So in our opinion, I think all of the operators are unanimous on this, that there's quite a lot of room for adjustment downwards.

And with Singapore opening and having an effective tax rate of about 5% on top line and another 7% on corporate taxes, there is a wide margin. It's effectively 39% versus 12%. So I think it will -- some VIPs would naturally will want to try Singapore. But I think the advantage of Macau really is its location, the fact that Macau is within a three-hour drive from almost 200 million people, and the fact that it's part of China.

So naturally, if you think there are visa restrictions from -- preventing people to travel from China to Macau, I think China is not going to be dumb enough to just refer people up and send the money to Singapore either.

So I think all in all, I think the opening of Singapore will hopefully be a good thing for Macau because that will cause the government to look at lower taxes.

Praveen, this is Simon. I appreciate that we've characterized the opening schedule of the theaters as a phase three just in terms of the public access for the show in there we're looking at end of the first quarter, early second quarter of next year. However, all of the CapEx associated with building the theater is incorporated in phase one and phase two budget. So there is no incremental CapEx associated with phase three.

Very good, thank you very much guys.

Thank you.

Your next question comes from the line of George [Chang] with Citigroup. Please proceed.

Hi guys, this is George from Citigroup. I've got --

Hi, George.

I've got a couple of questions. Firstly, regarding the net debt provision that you guys made in the second quarter, can you give us some more details on that? And can you tell us what did you do to improve your system so that you can avoid some of the things from happening?

Second -- wait a minute. I'll ask the second question after you give us the answer to this question.

I'm not going to go into any more detail around the bad debt provisioning that we've put in place. It's not a systems or a credit process related issue. Doubtful debts are a function of our business, and that is something that we have to manage as best we can.

We are looking to try and manage the reporting of our businesses accurately as possible. And in that regard we felt that it was appropriate to put a provision here. And if we're subsequently able to collect the money that are associated with this, then obviously we'll be able to refund the provision.

My second question is on the Macau. And this is --

You had a second question, George.

Yes, that is my second question. On the Macau Peninsula project, can you give us an update on the progress?

Yes, the Macau peninsula project has been our future pipeline as does a number of other things, the opportunity, for example, to develop another million square feet at the City of Dreams site, the Macao Studio City opportunity and so on.

So they are all very much in the pipeline, future developments for us. The market is also very dynamic. There are lots of other opportunities and things going on.

And I believe that with the reemergence of growth in the marketplace and with the sort of stimulus that we'll see towards the end of this year, a reengagement with capital market, we're going to be back into a situation where green field projects can be discussed again with some degree of merit.

Our immediate focus and the focus that we will have certainly as we lookout through the midpoint next year, as Laurence has already said, is to take the assets that we've got and to find ways to leverage these great financial models that we operate. We have fixed cost structures and we have a way -- a very straightforward way for us to increase the slight [volume] that we get from customers who come into the building.

And so when you put those two things together, you can leverage incremental revenues down through, and that's the way to grow your EBITDAs in the immediate term, that's what we're focused on.

Alright, thank you. Very good now, thank you very much.

Thanks.

Your next question comes from the line of [Garry Payne] with Macquarie. Please proceed.

Hi guys. How you're going?

Good, Garry.

Just a very quick question for Greg. Greg, is there any way that you can give us some disclosure or some color on where you guys are allocating mass market -- premium mass revenues, whether that's in VIP or in the mass segment?

And secondly on the premium mass segment, is there anyway you can give us a bit of insight into the commission rates that you -- or rebates that you're offering to the customers?

Yes, Greg, this is Simon. I'm going to jump in there. On the -- I think that you're talking, Garry, about the [Jinmen] tables, and where -- how we're reporting those through. The way you account for those if you account for it in the form drop rather than roll even though there is a hybrid across the table of drop and roll, we carry that drop through the mass numbers that we report for the marketplace.

We're not blending it into VIP numbers in order to try and inflate our hold rates to make it look like we're luckier than other properties.

Greg, and now if you want to take the second question.

Just with the rates that are applicable or allowed on the property that a bit realistically these are entry level. We think there is a distinct market for this part of the program which exists. So that's why we established the operation of that program and defined it, and operated in the mass area. So that's something we have a distinct team whose dealing really on a direct player relationship basis with players in the market who are certainly not of VIP level, but will only gain under that criteria.

So the type of front money is certainly managed very carefully and the commission rates really start from about the 0.3% range.

So let's be really, really clear in our definitions here in terms what we're talking about. This is commission structures to rolling chip customers who are buying in and rolling their chips, and so therefore it is no different from paying commission other roller chip customers. It should not be confused with a premium cash customer who happens to play at a higher limit on cash tables where you have comp programs, but they're all in non-cash form.

Sure. Okay. So just to go back to Greg's point, so 0.3% was kind of where it kicks off. Can you give us any color on kind of where it tops out at?

It wouldn't go any higher than about 0.6%. And I guess [room for] Simon's point as well. So there is a very limited number of tables dedicated to this. We've established some very significant, very successful mass cash operations by the east and west end of the property which are performing particularly well, which are obviously driven by environmental service and other distinct [copying] programs. So what you are referring to is quite a minor component at the mass level.

I'm glad you raised the question Garry. I'm glad you raised the question, because there is confusion in the marketplace. And people think that what we did is cash comp going to mass cash playing customers, and that is not what's happening.

Sure, sure. Is there -- just to elaborate a little bit on Greg's point. Can you give us some color in the month of July, for instance what -- of that mass drop that you saw, what proportion would have been premium and --

Yes we'll analyze July's numbers when we do in Q3, Garry. Thanks.

Right, okay. And just the other question, I don't know if you guys can give any color or light on this, but in terms of the commission caps that are being discussed at the government level, are you guys hearing anything in terms of how they're going to legislate credit that's going to given out to junkets by concessionaires or anything like that?

No, I don't -- we haven't got any further details on that, but I think that it's -- that's one of the unknowns, Garry, that we're all still working in, and around, and with, and there's no definitive solution that I'm aware of at this stage.

Okay, no problem. Thanks very much for your time guys.

Thanks Garry.

Thanks Garry.

Your next question comes from the line of Aaron Fischer with CLSA. Please proceed.

First of all, congratulations on the performance in July. I thought the results were excellent. I was --

Thanks Aaron.

-- from anyone except for Simon, just can you provide some guidance on the potential impact of the opening of the Grand Hyatt given that the occupancy for both the Hard Rock and the Crown has already been pretty high?

Greg?

Yes, certainly the point raised before was that the room demand has been particularly high across the first two months. So into July, we're really running at full occupancy on available rooms. And our -- certainly our ratio of rooms to gaming units is low on a relative basis as well. So we see significant upside when we get the high operational towards the end of September, early October, and step those rooms into the market, and would expect with strong demand.

But from a retail perspective, VIP gaming point of view, and also from a mass gaming perspective, its utilization and occupancy in that property would be particularly high. We're just working through some of those models currently.

Is there anyway we can quantify the effect on the gaming revenues?

And just --

Well, Aaron, this is Simon. It's the -- I mean you could quantify -- you can start trying to analyze it. We've got 600 rooms at the moment and about 300 of those rooms are really servicing the rolling chip universe, the high end play that we've got in the VIP side. They're basically all the rooms at Grand Hyatt. And then of what we've got left over, 300 rooms at the Hard Rock Hotel. As you're well aware, we're trying to spread that between a retail demand and a demand to service the mass casino floor. And the mass casino floor through comp programs is only getting 150 of those rooms.

When we bring 800 new rooms on stream in six weeks' time, it's clearly going to give us a very, very considerable increase in the amounts of rooms that we'll able to bring into our comp programs. Certainly bring it -- start to bring it somewhat in line with what I can (inaudible) still across the road, with 3,000 keys in terms of supporting a comp program.

Now, what is that going to do into the business, what it's going to do is it's going to ensure the gaming floor stays busy from midnight till 3:00 or 4:00 o'clock in the morning, which is the experience that you'll get if you go on to any -- you go to the Venetian, which is (inaudible) Cotai, there's no other accommodation that's sort of in and around you, unlike up in the Peninsula.

And what can you see on an upside in terms of keeping your gaming floors busy for another three, four hours beyond midnight, I don't know. I would speculate -- we'll soon find out, but I would speculate that you're probably going to see a 20% uplift in the efficiency that you're got in every player who is staying in the property through those additional hours, and you're going to have more people in the property in absolute terms. So it's very material and again it leverages down through a fixed structure. Those rooms are key.

Yes, that's what I've been thinking as well. Okay, well, good luck with everything.

Thanks Aaron.

There are no further questions. I would now like to turn the call back over to Simon Dewhurst for any closing remarks.

No closing remarks from me, just to say thank you for listening in our conference call, and we very much look forward to reporting back on Q3 in about three months' time. Thanks.

Thank you for joining today's conference call. Have a great day.