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Macau’s Lui Bets Big as Ho Family Splinters on Casino Empire

Francis Lui, deputy chairman of Galaxy Entertainment Group Ltd., left, and his father, Lui Che-woo, chairman and founder of Galaxy Entertainment Group Ltd., at the company's 2009 annual results announcement in Hong Kong on April 20, 2010. Photographer: Jerome Favre/Bloomberg

Casino billionaire Francis Lui fakes a puzzled frown as he poses for a photo shoot behind a mountain of chips at a baccarat table normally reserved for high rollers who bet as much as $250,000 a hand.

“Do you want me smiling or poker-faced?” he asks with a soft baritone laugh that reverberates around the wood-paneled 39th-floor penthouse suite atop his StarWorld Casino in the Chinese gambling enclave of Macau.

Flanked by willowy hostesses in split-to-the-thigh cheongsams, the conservatively dressed, bespectacled Lui, 55, has much to smile about. His family-controlled Galaxy Entertainment Group Ltd. holds one of just six licenses to operate casinos in the biggest casino market on Earth, Bloomberg Markets magazine reports in its April issue.

Macau, a former Portuguese colony on the South China coast that’s half the size of Manhattan island, is the only place in the world’s most populous nation where 1.3 billion Chinese are permitted to gamble in casinos. Revenue from casinos in the territory, which is 60 kilometers (37 miles) southwest of Hong Kong, soared 58 percent to $23.5 billion last year -- more than quadruple the $5.8 billion gambled on the Las Vegas Strip, according to statistics compiled by both jurisdictions.

The rise in Hong Kong-listed Galaxy’s share price is just as impressive. As of March 8, the stock had more than tripled to 10.92 Hong Kong dollars from HK$3.21 at the start of 2010. The shares have outperformed those of rivals such as Sheldon Adelson’s Las Vegas Sands Corp., Steve Wynn’s Wynn Resorts Ltd., Australian billionaire James Packer’s Melco Crown Entertainment Ltd. and Stanley Ho’s SJM Holdings Ltd.

New Casino

On March 10, the Luis are scheduled to announce the opening date of the family’s biggest development yet. The $1.9 billion, 2,200-room Galaxy Macau resort will feature 5 gaming areas with a combined floor area equivalent to 3 football fields; 3 hotels; 50 restaurants; and, on the roof, a palm-fringed beach with 350 tons of white sand imported from neighboring Guangdong province and lapped by artificial waves.

Meanwhile, the dominant figure in Macau gaming for the past half century may be fading from the scene. On Jan. 24, Ho, 89, appeared to surrender control of the company that operates 20 of Macau’s 33 casinos. SJM notified the Hong Kong Exchange that Ho had transferred his shares in a family company called Lanceford to relatives, effectively ceding ownership of Sociedade de Turismo e Diversoes de Macau SA (STDM), the closely held company that controls SJM.

Court Battle

Two days later, the wheelchair-bound Ho, who fathered 17 children by 4 women he refers to as his “wives,” filed a lawsuit alleging that 2 of those wives and 5 of his children had illegally grabbed control of his assets. Although that lawsuit was subsequently withdrawn, on Feb. 16, Oldham, Li & Nie, the law firm representing Ho, filed a new suit against some family members that accused two of Ho’s daughters of seizing the tycoon’s holding in STDM. Those relatives deny the allegations.

The feud, which is still playing out in Hong Kong’s courts, dragged down SJM’s stock price by 20 percent as of March 8 from this year’s Jan. 19 peak as investors fretted over who was in control.

As the Ho dynasty trembles, the Lui family, whose five existing casinos account for 12.5 percent of Macau’s gaming revenue, is betting they can extend their winning run. The Luis have a track record of defying the odds. Chairman and founder Lui Che-woo, 81, arrived in Hong Kong in 1934 as a 4-year-old refugee from war-ravaged mainland China. Francis Lui says that at the age of 13, his father was helping support his family by selling food on the streets of the British colony before making his first pot of gold trading war surplus equipment and then moving into construction, property and hospitality.

Family Business

Today, in partnership with three sons and two daughters, Lui Che-woo presides over a multinational empire that includes hotels in the U.S., office towers in China, quarries in Hong Kong and the Macau casinos.

Though still active in the boardroom and on the golf course, Lui Che-woo delegates the running of the casinos to vice chairman and eldest son Francis, who holds a master’s degree in structural engineering from the University of California, Berkeley, and says his idea of relaxation is to walk the family dog.

A younger son, Lawrence, stayed in the U.S. after gaining a master’s from Massachusetts Institute of Technology. Today, he runs the family’s main U.S. business, the San Francisco-based Stanford Hotels Corp., which owns seven Hiltons, three Sheratons and two Marriotts. A third son, Alexander, 47, who studied at the University of Southern California, is an executive director of the family’s only other publicly traded company, Hong Kong-listed K Wah International Holdings Ltd., and oversees its Hong Kong properties.

$3.5 Billion

Daughter Paddy, 56, a business studies graduate of Montreal’s McGill University, is an executive director of both Galaxy Entertainment and K Wah. Another daughter, Eileen, serves as director of human resources and administration at Galaxy and doesn’t hold a board membership.

Although Francis Lui declines to discuss the family’s wealth, their holdings in Galaxy and K Wah alone are currently valued at about $3.5 billion.

Success with the new venture is no one-way bet. Although Macau, like Hong Kong, is an autonomous special administrative region of China, its surging casino revenue hinges on the policies of the government in Beijing, which controls the movement of people across the border.

Real Estate Boom

With a population of just 550,000, Macau is dependent on 25 million annual visitors. In recent years, Beijing has at times temporarily reduced visa permits to cool an overheating Macau economy that as recently as the second quarter of 2010 soared by 31 percent, according to data compiled by Bloomberg, compared with a 10.3 percent rise in China during the same period. Macau real estate prices will gain 20 percent this year, according to Midland Holdings Ltd, Hong Kong’s largest publicly traded real estate agency.

While the Macau government supports the gaming industry, Beijing is of two minds, says Zeng Zhonglu, a professor of gaming research at the Macau Polytechnic Institute.

“The central government does not want too many pathological gamblers,” Zeng says.

Francis Lui says it’s in Beijing’s interests for Macau’s casino industry to grow. He says Chinese government policy encourages domestic consumption, which at present comprises just 35 percent of gross domestic product, barely half that of the U.S.

‘Believe in Macau’

“If you believe in the China consumer story, you have to believe in Macau,” he says.

The Luis should have no problem filling the Galaxy Macau, says Billy Ng, Hong Kong-based gaming analyst at Bank of America’s Merrill Lynch unit, who rates the stock a “buy.” In the past 10 years, annual disposable urban household incomes in China tripled to 17,200 yuan ($2,600). Wealthy individuals, such as the high rollers who already pack the VIP rooms at the StarWorld, now control $2.3 trillion in disposable income, according to Bank of America Merrill Lynch. Given all that wealth, Ng estimates Macau’s casino revenue could rise another 27 percent this year to almost $30 billion. So far this year, revenue has risen 33 percent in January and 48 percent in February, from the same months a year earlier.

“It will be enough for everyone, including the new casino,” Ng says.

Adelson Competitor

The Luis have built Galaxy Macau right next door to, and in direct competition with, Adelson’s 3,000-room Venetian Macao Resort Hotel. The Venetian, the territory’s biggest casino, is a replica of the U.S. company’s flagship Las Vegas resort, right down to the imitation Grand Canal, singing gondoliers and artificial blue sky.

When the Luis won their gaming concession in 2002, they originally planned to run their casinos in partnership with Adelson’s Las Vegas Sands. Within a year, however, the partners fell out because Adelson wanted to re-create the Las Vegas Strip in South China and the Luis wanted to build casinos and resorts designed for Asian tastes.

“If we followed the Vegas model, we would always end up No. 2,” Lui says. “We do not want to settle for that.”

One small but telling difference in emphasis between the former partners: In November, Adelson’s Sands Macao opened Asia’s first Playboy Club -- complete with blond Bunnies, some of whom hail from the U.S. and Australia. By contrast, Galaxy Macau’s showpiece nightspot will be called China Rouge and feature scantily clad Asian performers in a display of what it describes as “Shanghai 1930s decadence.”

Different Tastes

Ron Reese, a Las Vegas-based spokesman for Adelson says the difference in tastes accounts for the split between the former partners.

“I think competing visions is a good way to describe it,” he says. “Our success is not dependent on their failure and vice versa.”

Permira Advisers LLP, a European private-equity fund that controls about 20 billion euros ($28 billion) in assets, is wagering that the Luis hold a winning hand. In 2007, London-based Permira paid $838 million for a 20 percent stake in the company.

“We were looking for a Chinese partner to enter the Macau market, and we believe in the Lui family’s vision and entrepreneurial flair,” says Martin Clarke, a London-based Permira partner who also sits on the Galaxy board.

‘Blazing Performance’

Galaxy Macau also has the advantage of being the only casino to open in Macau in 2011, says Jonathan Galaviz, managing director of Las Vegas-based consulting firm Galaviz & Co., which advises casino operators in the U.S. and Asia.

“Given Macau’s blazing performance, the timing could not have been more perfect for Galaxy,” Galaviz says.

Should the Ho dynasty fragment, the Luis will be in an even stronger position because they are the only other Chinese casino owners in Macau, says Miguel de Senna Fernandes, a Macau lawyer and former legislator. Gaming taxes account for two-thirds of the Macau government’s revenue. Given the importance of the industry, Beijing would rather it be run, where possible, by Chinese, Fernandes says.

“If there is a split or any kind of instability in SJM, Galaxy will benefit for sure,” he says. “The Luis have better access to the Chinese government and know better than the Americans what the Chinese gambler wants.”

Though reluctant to comment on Ho’s woes, Francis Lui says there’s no danger his family will suffer the same fate.

“We are very grateful that we have a closely knit family and that we do not have to worry about the next time we have to see each other in court,” he says.

From China to U.S.

The Lui family’s Macau adventure is the latest twist in a sweeping four-generation saga that twice forced clan members to flee China in poverty.

As the Qing dynasty collapsed in chaos a century ago, Francis Lui’s great-grandfather moved to San Francisco from the impoverished village of Jiangmen in Guangdong, the Cantonese-speaking Chinese province that abuts Hong Kong and Macau.

After making his fortune running a laundry, the Lui forebear returned home and became a landlord. That comfortable life ended in 1931 after Japanese troops invaded Manchuria. In 1934, the family -- by then including the infant Lui Che-woo -- fled to Hong Kong.

Hotels, Casinos

After a spell trading war surplus machinery, Lui Che-woo was left with some rock-crushing plants the family couldn’t sell and decided to make use of them by setting up a quarrying business. At 25, Lui Che-woo founded a company he named the K Wah Group, which later diversified into concrete, cement and pipes. Today, the company says its construction materials have been used in one-quarter of all Hong Kong buildings.

Lui Che-woo also turned to property development. In 1979, he built his first Hong Kong hotel, originally a Holiday Inn and since rebranded as the InterContinental Grand Stanford Hong Kong.

As the K Wah business empire expanded into the U.S. and mainland China, the Lui children spotted an opportunity closer to home. Just an hour by ferry from Hong Kong, Macau in 1999 was to be returned to Chinese rule after 400 years of Portuguese control.

More significant for the Luis, a gaming monopoly, awarded to Stanley Ho in 1962 for 40 years, was to expire on Dec. 31, 2001, and the Beijing-appointed government was promising to introduce competition.

Ho’s casinos were no-frills gambling dens. Yet each of their 340 tables returned on average 10 times as much as those in Las Vegas, according to a 2002 Deutsche Bank AG report.

“Casinos then were smoky rooms associated with vice and crime,” Francis Lui says.

Seizing Opportunities

“We weren’t the wealthiest people in Hong Kong, but we saw an opportunity others didn’t. As kids we had gone to school in the States and had been to Las Vegas. We were convinced that the entertainment and gaming industries could be merged into a super industry.”

Lui Che-woo was also well-connected in China. Like Ho, he had served on the Chinese People’s Political Consultative Conference, a Beijing-appointed body that advises China’s parliament. Chinese government scientists had even named an asteroid in his honor.

The Lui family, which teamed up with Adelson, was among 17 applicants for the licenses -- and one of three initially selected by the Macau government. Another went to Wynn and the third to Stanley Ho. When Lui and Adelson had a falling-out, the Macau government, not wanting to lose Las Vegas Sands, allowed each of the license holders to issue a sublicense. Las Vegas Sands was given Galaxy’s sublicense.

Kerkorian, Packer

Ho sold his to a joint venture between Kirk Kerkorian’s MGM Resorts and one of Ho’s daughters, Pansy. Wynn sold its sublicense for $900 million to Melco Crown, a joint venture between Packer and one of Ho’s sons, Lawrence.

The rival companies then began a frenzy of construction, both in downtown Macau, which is on a peninsula that protrudes like an appendix from Guangdong province, and on the Cotai Strip, an isthmus of reclaimed land connecting two offshore islands.

As Galaxy’s StarWorld, completed in 2006, started to attract high rollers to its VIP rooms, the Luis began to build the even bigger Galaxy Macau on the Cotai Strip. Just weeks after Permira made its $838 million investment to help fund the new casino, the global financial crisis intervened, hammering the stocks of casino companies worldwide. From a high of HK$9.14 in October 2007, Galaxy’s shares plunged 94 percent to 53 Hong Kong cents a year later.

Galaxy Rebounds

The Luis and Permira decided to slow down work on the Galaxy. Simultaneously, Galaxy reduced debt by buying back $285 million of bonds at 50 cents on the dollar. In 2009, the company reported a profit of HK$1.15 billion ($145 million), following a HK$11.5 billion loss the previous year. The stock later catapulted back to surpass its precrisis peak. On March 8, the value of Permira’s stake had risen to $1.13 billion.

With StarWorld, the Luis target the VIP market, high-rolling gamblers mostly brought to Macau from China by junket operators. Apart from the hotel rooms, many of the floors are made up of plush suites where gamblers, mostly playing baccarat, can bet up to HK$2 million a hand.

On the top two floors of the hotel, exclusive suites are reserved for the highest of high rollers. They feature their own gaming tables as well as bathrooms with Jacuzzis and private massage tables.

Asian-Flavored Service

The much-bigger Galaxy Macau will appeal mainly to the so-called mass market of middle-class Chinese. Unlike Adelson and Packer, who have brought in famous Western hotel brands such as Four Seasons, Hard Rock and Sheraton to manage the accommodations in their casinos, Galaxy Macau’s three hotels will be operated by Japan’s Okura Hotels & Resorts Ltd., Singapore-based Banyan Tree Holdings Ltd. and Galaxy’s own hotel unit.

They will provide an Asian-flavored standard of service, Francis Lui says.

“It’s like when you go on an airline,” he says. “Which would you prefer? I would bet 8 out of 10 customers would prefer to fly Cathay Pacific or Singapore Airlines than United.”

One question Lui leaves unanswered is what comes after Galaxy. The huge casino covers only one-fourth of the land the company has leased on the Cotai Strip. Lui says he doesn’t want to develop that too soon in case Chinese gamblers’ tastes change.

“Look at Beijing and Shanghai,” he says. “The lifestyle today is night and day compared to five years ago. In China, customer preferences are evolving so quickly that there’s no telling what people will want in another five years.”

That’s why the casino tycoon who finds it hard to keep a poker face for the cameras isn’t yet prepared to show his hand.

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