Star Entertainment's latest plans

Star Entertainment is a stock we own in our growth and income portfolio and it's one of Australia's largest casino operators. It has an enormous development currently underway in Brisbane with over $3 billion. 

Today I'm talking with the Chief Executive, Matt Bekier who has been with the company since 2014.

The share price has doubled since then, but it's actually come off around 35 per cent from a high of over $6 recently, which is why we added it to the portfolios. The current valuation is almost half what the valuation for Crown Resorts would be, should James Packer get the almost $15 per share that he seems to want to sell his large shareholding. 

There's a lot to talk about with Star Entertainment in Sydney having new competition, and also with the new developments at the Gold Coast and in Brisbane. 

Here's Matt Bekier, the CEO of Star Entertainment to explain more. 

Matt, you've been Chief Executive of Star Entertainment for around five years now.  Do you remember some of the initial goals that you set for yourself?

Yeah.  Oh yes.  Look, when I started out, the share price was about $2.13 I think on the day that I was appointed.  I felt strongly that that was not reflective of the underlying value of the business.  With the team around me, we set out to make sure that we can realise more of the value.  We did it essentially in three steps.  The first thing was all about getting our house in order.  We spent the first 12 to 18 months, taking out inefficiencies, establishing better protocols, better controls, just really, cleaning house.  Then we moved into a set of initiatives to be called building muscle when we started to focus on the areas that we thought would really drive growth.  That was things like really trying to win the bid for Queen's Wharf, investing into our tourism capability, investing into our loyalty and marketing capability.

Now that we're sort of starting to see the benefits of that to come through.  We've added one more step that will help us realise the value, which is about changing the game.  This is where we start to introduce really contemporary data analysis into everything that we do from gaming to marketing, to HR rostering, all of the things we do because we are very rich data environment.  We can really leverage it to a competitive advantage.  Those are the things we set out to do to drive value.

What was the hardest thing you had to change?

Hardest thing for us to change is to break through traditional ways of doing things.  The casino and gaming industry historically has been quite closed, and people typically were being recruited from within the industry.  Everybody kind of does it the same way.  The hardest thing for us to do, was to introduce contemporary ideas from outside the industry into the organisation.  For example, the way we do loyalty looks a lot more like the way a retailer or airline would do loyalty than how a traditional, loyalty program would have looked like in a gaming environment.

Okay.  I want to actually come back to loyalty programs, but first I just want to talk quickly about the Brisbane Casino development at Queen's Wharf.  Which has 1,100 hotel rooms, 5 towers, 4 football fields of entertainment, and 84 bars and restaurants.  So it really is going to transform the city.  The new casino is your first opportunity at Star to build something from scratch.  Can you give us some insight to the planning process?  What parts involved in house staff and when and for what parts do you go and get outside help?

Look, the development – the bid was won, I think in 2014 and since then, and it was won essentially with a set of designs and drawings that I think architects would describe as 10 per cent accurate.  What we've been doing since then has been to continue to refine our design to a level where we just tendered out the shell and core part of the development.  The total development is a $3.6 billion development, and we've just tendered out the heavy construction part of it.  Which I'm glad to say has come in on budget.  That has been tendered out at about 70 to 80 per cent design accuracy.  We're now getting very close to really closing down everything, and just executing against these plans.  In doing so, we have an internal team of about 40 people that are really project managers to drive the project.  All other capabilities are brought from outside parties, whether that's town planners, architects, engineers, they're all being brought in to help us leverage pre-existing knowledge.

Aside from just the pure scale of the development, is there anything that you're doing that's revolutionary or just very different?

The development will be quite transformational for Brisbane because of the size and the location.  We are unbelievably well placed, from a public and private transportation point of view.  That means that, dealing with traffic flows and moving people around the property is a big part of our value proposition.  The centrepiece of our development is what we call a sky deck, which is over 100 metres above ground, wraps around connects all four towers.  It's an open public space.  The planning around how we get people up there, how we feed them, how we entertain them.  We're looking at putting a zip line from up there across the river that is probably quite novel and certainly hasn't been seen in Australia.

You've brought two large Chinese companies in on the deal and they each have a shareholding in Star Entertainment.  How did the relationships with retail and hospitality conglomerate Chow Tai Fook, and property developer, Far East consortium come about?

Chow Tai Fook and Far East are Hong Kong based as you point out but they’re a lot more than just property developers.  Chow Tai Fook has retail, jewellery, they own and operate the largest jewellery chain in the world.  They also have hotel assets.  They have development capabilities.  Far East is a large property developer.  They've done some $5 billion worth of property development in Australia alone.  They were in the early parts of tendering, were involved in the tender process for Queen's Wharf.  We then decided to partner up because we believe that with our experience in Queensland and global gaming markets, our experience in hospitality and food and beverage, we could combine that with their insights and their access to customers in China and in South East Asia, that, that would be a very powerful combination. 

It also meant that we were able to defray some of the capital costs that would be required.  In particular, the development in Brisbane has quite a bit of a residential development.  We were able to leave that development risk entirely with our partners.  We're not getting involved in property development in Brisbane.  We’re entirely focused on what we’re good at which is running a large integrated resort.

No doubt, these companies are going to help attract Asian gamblers to Australia.  Just can you tell us what type of customers they'll be able to bring to Australia and how they actually go about getting those people here.

There's a couple of aspects of that.  I mean, the integrated resort in, Brisbane will cater to local residents as well as international tourists.  We call it integrated resort because there's a lot more than gaming in there.  The gaming area is only about 5 per cent of the total integrated resort.  You mentioned early on we’re creating 84 bars and restaurants.  We've got the space for 84 bars and restaurants.  What we’re trying to do with that is make the integrated resort first and foremost relevant to local visitors. 

Because our research has shown very strongly that when tourists come to Australia, they don't want to go and be locked away in isolation in some sort of ghetto.  They want to do what the locals are doing.  For us to be successful, we need to be able, first of all, need to make sure that the Queens Wharf is successful in the eyes of the people around Brisbane and the visitors, the local business that come to Brisbane.  Once that's a vibrant place, we'll be able to attract tourists.

Now the tourists that we hope to get, are high-end tourists, international tourists.  Already today China is the largest sourced market for tourism in Australia.  The Chinese tourist that we see today spends a multiple above the nationalities on a per trip basis in Australia.  So it's a very attractive customer.  We have negotiated with our partners to access into their loyalty system.  When Queen's Wharf comes out of the ground, we will be able to sell that integrated resort into their customer base.  Chow Tai Fook through the jewellery business for example, has over 6 million of pre-qualified high-end customers on their database. 

The impression I want to leave you is that this is a lot more than just a high-end VIP gaming facility.  This is primarily a large entertainment space that we're building in Brisbane.

I want to quote something you said in a recent interview, just again on the overseas tourists theme, just gives a bit of a view into the potential scale of what's out there or the opportunity.  “The typical Chinese visitor to Australia spends about $8,000 on their trip.  A quarter of people visit the casinos.  So, out of that big wallet, we only get a very small proportion, it’s $150 out of 8,000 it should be double digits.”  $150 sounds like they're not doing much more than buying lunch in the food court. I just wonder what the trick is to increasing that amount of spend.

Time.  Space and time.  The typical itinerary of the Chinese tourist is totally packed with activities.  We haven't really advertised in China in the past, they find out about our properties when they are on the ground and then they squeeze us in for a side trip.  They typically just over an hour on our property.  Then they spend up, as I said, $100 to $150 per visit over the hour or two that they're on property, have something to eat, maybe a drink and maybe they’d have a flutter.  But we know that if a customer stays on property, they spend more time and they use multiple aspects of the integrated resort. 

They might go to a theatre and might have a bigger meal, they might have spent more time on the gaming floor.  The challenge for us will be to become more relevant in their itineraries and get to spend more time with us.  Hotels are a critical part of that.  If you think about, you know, all the hotel capacity that we're building out in the Gold Coast in Brisbane and you know, should planning ever be granted, also here in Sydney, that's really what this is for.  To get more of those high-end, tourists to come and stay and spend time in our properties.

In Australia we always hear about Chinese money and investment, but we don't usually hear anything about Middle Eastern VIPs or investors that a commonly cited in places like London?  Is this simply due to the distance?

No, it's simply due to the relative sizes of the markets.  The global VIP market is very heavily skewed towards Chinese gamblers.  Historically, yes, there were a few Middle Eastern players and they're still around.  But in terms of absolute size, it's all about the Asian customer.  You see that when you look at the relative sizes of the global VIP markets.  Macau is about 70 per cent of the global VIP play.  Second is Singapore, with just over 10 per cent.  Number three is Australia with about 4 per cent of the global market.  London is nowhere.

Okay.  How should investors think about the value of the Brisbane casino, for example, will the profit margins be similar to the existing Australian casinos?  Or will it take time for profits to ramp up or do they flow pretty quickly with the excitement of the new opening?

There's different revenue streams will develop at different pace.  When we open up, we don't open up the total capacity straight away.  It will take about 18 months for all of the capacity to come on stream.  We do that deliberately because we want to smoothen out the opening endeavours over a longer period of time.  We want to have more exciting stuff to sell for longer periods of time.  The revenue streams do ramp up over time, and it typically takes two to three years to get the full load. 

When we look at the domestic mass market, we expect that to pick up pretty much straight away because of the accessibility of the product and because we have an existing operation that we can inject into an existing customer base from Treasury that we will inject into the new property.  That should go pretty quickly.  The international business, should happen pretty quickly because the experience has been as you open up a new facility, the word spreads around the world pretty quickly in all the VIPs will come in and have a look at.  The challenge will then be to have repeat business and not just have the one look-see trip.  But make sure we build up a sustainable business that continues to grow over time.

It's becoming, as you mentioned, increasingly common that casino, retail and office developments are including a large number of apartments in the actual developments.  Can explain why it's a good way to help finance the overall development, and why it's becoming more popular?

Let me give you the example for the power in the Gold Coast that are under construction right now.  The Gold Coast as you know, we operate a large integrated resort with two hotels.  We currently have about 700 keys on site.  The additional tower is half apartments and half hotel.  This will be a Dorset hotel.  We're building that tower with our partners, Chow Tai Fook and Far East.  The way the economics work is...  We're a third, a third, a third.  The way the economics work out is that the total development costs of their tower, is some $400 million.  The apartment sales, they're all pre-old and we're just north of 90 per cent of all the apartments are already pre-sold.  When the apartments settle, the proceeds from the apartments essentially fund the hotel tower.  That means that after the development with no net capital injection, we actually get some 700 additional keys onto site.  That means there's almost half a million additional room nights that get generated every year on the site without any additional capital injection. 

The real upside for us, is not just hotel revenue, but is primarily the flow through business to the existing road, the restaurants, bars, and the gaming floors.  That's why it's very exciting for us to have those partners that have the development capability and the sales capability that allow us to develop these assets in such a capital light way.

In Sydney, there's a bunch of new five star hotels slated for completion around the Darling Harbour area over the next few years, including a Ritz Carlton.  Do you expect this is going to attract more Asian visitors in particular and therefore increase the size of the pie for the Star Casino?  Or are you expecting this is a potential risk to the Star's, revenue and profit margins?

The Ritz Carlton that you reference is actually ours, that's the project that we have been in planning with for the last four years and hope to get up and we very much believe that that's going to be an attractive addition to the existing hotel towers that we have on site.  But recently we've had a Sofitel open up around the corner.  There's double the development and we think that's terrific. 

I look at the last Lunar New Year activities here.  We took massive hotel block bookings from hotels around us, to accommodate all the guests that wanted to come and participate in the Lunar New Year activities around Star.  The more hotel capacity we get into Sydney, the better it is.  Because as I said, we are comfortable and confident that we will be able to attract a lot of the activity onto our site.  I'd love to have the hotels on our site, but you know, there's only so much you can do.

Can you take us through the process for deciding which poker machine suppliers you go with?  For example, is it simply performance of the machines?  Is it any financial incentives offered or perhaps different contract lengths?

Look, when we make decisions about slot machine purchases, we try to identify the product that performs best.  We look at what's successful in other markets, and that is the only real criteria that we apply to the purchases. 

Technology is impacting virtually every industry faster than perhaps ever before.  What areas of your business have benefited most from newer technology and ways of doing things?

We have spent a lot of money in building up a technology platform that allows us to fully understand customer behaviour.  All of our outlets, are hooked up to the same loyalty system.  All of our gaming products is hooked up to the same loyalty systems.  That means we can understand what customers do, what types of product they respond to.  Then stimulate that through our loyalty system.  If the number one investment in the past has been in establishing that platform, the biggest investment from here on is in developing the analytical capability to really understand the data and develop actionable insights out of that.

One of the biggest growth areas in funds management has been the growth in ethical investing.  Any company associated with gambling or wagering is usually excluded from those funds.  But I just wondered whether you'd had any discussions or many discussions with these types of fund managers, and what issues were highest on their agenda?

We've not really run into any real trouble on that front and because, we take our responsibilities in that space very seriously.  The biggest issue for us is responsible gambling.  Which we believe is a core aspect of how we conduct our business.  We've been recognised by people like the Dow Jones Sustainability Index for our leadership in that space.  That has served us well with our investors.  We take our, CGI responsibility seriously.  We take our environmental responsibilities very seriously, and continue to improve our efficiency in terms of our carbon absorption and energy absorption every year.  We've only had a good reception with investors from that point of view.

As an investor in your company, we're in no hurry to see you go, but we've seen a number of sudden CEO departures recently in Australia without an internal replacement.  What's the succession plan if you get hit by the proverbial bus?

Well, thank you, for that.  I'm planning to be around for a bit longer.  But succession planning, look, is a topic.  One of my personal objectives here is to make sure that, if all goes to plan, that we have an organised handover of operations to an internal successor.  I think that would be real evidence that our succession planning has been effective.  This is something that the board is working with me on.  We have a number of internal candidates on the panel that we continue to develop to get them into the position and if the proverbial bus did hit me, the board would know who to slot in immediately.

Okay.  One last question, Matt.  In the US at least we've seen a number of hotel rooms being booked directly with hotels, increasing recently at the expensive online travel agent businesses like booking.com and Expedia, as hotels try to increase lower tier with discounts squarely aimed at avoiding the high cost of booking rebates paid to these online travel agents.  Are these types of loyalty schemes something that you prioritise across your casinos to try for repeat bookings and avoid paying Expedia and the like?

We run our hotels at a very high utilisation.  We typically have about 95 per cent utilisation and that's because we rely only for a small part of our business for customers that we don't know for cash customers.  We mostly actually market our hotel rooms through our own internal loyalty system, and we use that very aggressively.  It's part of our loyalty program, our top tiers actually get preferential access to our hotel rooms at preferential rates.  That's how we push our own demand.  That's certainly something that we are doing actively right now.  We don't rely on third party loyalty systems.

Okay, just one last question.  You've recently spent a bit over $200 million upgrading the VIP facilities Star Casino in Sydney.  I was just wondering whether you can take us through the detail of what that's designed to do?

That project is underway.  It commenced about 12 months ago and will complete in about 12 months or just under 12 months from now.  What that will give us, you should think about private gaming rooms, a bit like frequent flyer lounges.  It's very closely aligned to our loyalty system. In the same way that if you're a business class traveller, you get access to a business class lounge.  If you're a first-class traveller you get access to the first-class lounge.  We offer similar facilities.  In terms of our investment it’s aimed at our first-class lounge, the top tier of our domestic customer base.  We're looking to expand, the physical size of our, well, basically double it and turned it much more into a real lounge that allows our customers to relax, have a range of bars and restaurants available inside of those facilities.  Make sure they can entertain their friends there successfully.

Unfortunately, we had to leave it there, Matt, but we just want to thank you very much for your time.

Great.  Thank you, Nathan.

Disclaimer: Please note that Star Entertainment is held in the Intelligent Investor Growth and Income Fund, including the listed fund ASX:INIF.