Back to the future
As gaming revenue growth returns, questions remain on whether Macau has created the foundations for a sustainable recovery. By Muhammad Cohen
Signs of Macau’s rebound abound. October saw a third consecutive month of rising year-on-year gross gaming revenue after 26 straight months of decline. More than US$10 billion in new properties have filled out Cotai, adding 8,269 guestrooms and a host of new reasons to visit. In September, overnight visitor numbers increased 12%, continuing a year-long trend, and for Golden Week at the start of October visitor arrivals rose 8%. Galaxy Entertainment reported third quarter EBITDA rose 28% year-on-year owing in part to double digit growth in mass and non-gaming revenue. Following the Cotai resort openings, Morgan Stanley Asia upgraded Wynn Macau and Union Gaming upgraded Las Vegas Sands on the strength of its Macau business. But even if Macau has turned the corner, questions remain about whether it’s on the road to sustainable long term growth.
Gaming revenue began its turnaround with growth of 1.1% in August then 7.4% in September. JP Morgan Securities Analysts DS Kim and Daisy Lu note that September’s average daily revenue (ADR) of MOP$613 million (US$76.6 million) beat ADR during this year’s Golden Week holiday month of May. Openings of Wynn Palace on 22 August and Sands China’s Parisian Macao on 13 September clearly contributed to the rise, but perhaps not as anticipated.
The VIP market – wizened from MOP$239 billion and 66% of GGR in 2013 to a projected MOP$111 billion and 46% of GGR this year – led Macau’s growth in August and September, industry observers indicate. There were reports of above average VIP hold in September along with signs of the relentless consolidation of the sector in both months as Wynn Palace and Parisian each provided VIP rooms for top three junkets Suncity, Neptune/Guangdong and Tak Chun only.
Union Gaming says the top three have grown VIP market share from about 50% in 2014 to as much as 80% now, in part because they’ve been wooing other promoters’ agents with higher commissions. Exclusive deals with attractive new casinos help drive even greater consolidation. The new openings reportedly came with increased liquidity, and that links to another trend.
Noting that September marked the one year anniversary of a Dore Group employee absconding with an estimated HK$330 million (US$42.5 million), Morningstar Asia Equity Analyst Chelsey Tam reports renewed faith among lenders to junkets.
“According to our check, confidence in the safety of the deposits in the junket system has continuously improved since the new year, helping liquidity and thus VIP rolling in the junket market,” the Hong Kong based analyst says. “The funding is coming from various individuals instead of just one or two big depositors, which leads us to think that it is more broad-based and more sustainable.”
Since the Dore incident, Macau’s Gaming Inspection and Coordination Bureau, the casino regulator known by its Portuguese initials DICJ, has imposed new financial and reporting rules on junkets, spurring consolidation and lifting the game of survivors. Two recent developments should further boost Macau’s VIP revenue.
After embezzling an estimated HK$10 billion, former Kimren Group junket executive Huang Shan has emerged from hiding and, working with Hengsheng Group, promised restitution to bilked investors. Perhaps more important than repayments, the situation demonstrates junkets retain the power to keep their own industry in order.
Employees of Australia’s Crown Resorts arrested in a series of raids last month in mainland China underscored the risks of marketing casino properties there. Mainland law prohibits promoting gambling, so casinos highlight their non-gaming aspects, but boundaries are not clear; what was allowed yesterday may be prohibited tomorrow. Casinos have reportedly withdrawn marketing teams from the mainland, meaning they’ll rely more on junkets to find mainland high rollers.
The arrests may also put an exclamation point on Chinese government warnings about patronizing “overseas” casinos, rather than gaming in Macau. Junkets have been ranging beyond Macau, where clients can get better rebates (out of junkets’ higher profits) and perceived greater privacy than Macau. Junkets contacted by Inside Asian Gaming wouldn’t comment on whether they interpret the Crown raids as a signal to keep business in Macau, where it’s much easier for mainland authorities to track players and the local government gets its 39% tax levy.
The recent spike in VIP revenue follows Macau custom.
“VIP has historically led Macau into and out of downturns,” Wells Fargo Securities Senior Analyst Cameron McKnight says. “When revenue growth slowed in 2012, when fears of a hard landing in China were paramount, it was led by VIP. When revenues recovered and took off in the second half of 2013, it was led by VIP. However, the VIP business carries low gross margins and is quite volatile. For this reason, investors consider VIP earnings lower quality than mass, which is more diversified, sticky and higher margin.”
JP Morgan forecasts VIP revenue will account for just 12% of operators’ EBITDA this year.
In Macau, there are more than practical reasons to believe that only mass market revenue will lead to sustained recovery. “A VIP-led recovery would not be sustainable, if for no other reason than it would be unlikely to pass political muster,” Union Gaming Head of Asia Equity Research Grant Govertsen says. “Clearly there is a mandate from all levels of the government that Macau rely less on VIP going forward and focus on mass market. By mass market we not only mean mass market gaming, but various nongaming amenities, too.”
For the third quarter, Macau’s GGR rose 1.2%, with the DICJ reporting VIP revenue down 1% and mass revenue up 4%. Adjusted for table reclassifications to foil the smoking ban, Union Gaming estimates VIP revenue fell 6 to 7% while mass revenue grew 8 to 9% and represented 54% of total gaming revenue.
Digging into the DICJ data, baccarat’s third quarter share of GGR fell to 87%, the lowest level in seven years, according to Union Gaming. Multi-game terminal play, mainly in stadium configurations with dozens of seats, rose 16%, Sic Bo was up 12% and with slots, down 3%, represented nearly 10% of GGR. These numbers plus recent arrival figures indicate a shift in the market.
STAY WITH ME
Through this year’s first three quarters, Macau’s arrivals are virtually flat at 22.9 million, but the visitor mix appears to be transforming. Overnight visitors are up 8.5% from a year ago to represent 49.9% of total arrivals (54% in September), and their previously stagnant length of stay rose a tenth of a day to 2.2 days. Day-trippers are down 7.2%. Arrivals from top two markets mainland China – 66.2% of the total – and Hong Kong are off marginally, while numbers three and four Taiwan and South Korea, a combined 5.6% of total arrivals, are up double digits.
The gaming and arrival numbers suggest additional overnight guests represent a new group of visitors being drawn to Macau, rather than day-trippers, whose average stay is less than five hours. That emerging visitor segment could form the base for a mass market centered recovery in this transitional period for Macau.
New openings during the last 18 months, starting with Galaxy Macau’s phase two and Broadway in May 2015, have added 8,269 hotel rooms – 6,700 rooms in the past 12 months – plus lazy rivers, magic shows, local food centers and sky high vistas, real and virtual. Once again, Macau has come a long way in a short time, but it isn’t done yet. There are still another two integrated resorts to come, plus two more phases of Galaxy, investments that will easily top US$5 billion, plus The 13 with its limos delivered but opening date driven into next year, some key land parcels awaiting development and the bridge from Hong Kong and the light rail visible on the horizon.
For now, analysts differ on whether the city’s tourism menu is halffull or half-empty. Sanford Bernstein estimates Macau’s non-gaming revenue will expand at a compound annual rate of 12% through 2020, and a recent report focuses on the luxury shopping segment.
SHOP TO STOP THE DROP
“While the dollar revenue and profit generated by the casino operators through retail (largely rental income) is modest, a critical mass of differentiated retail offerings acts as a draw for visitors to come to Macau and consequently spend on accommodations, F&B, and, most critically, in the casino,” Bernstein’s intercontinental team, led by Senior Analysts Vitaly Umansky in Hong Kong and Mario Ortelli in the UK, writes. “The Macau gaming market is rightly embracing retail as an important amenity and magnet for (mostly Chinese) customers seeking a more diversified travel destination. To drive visitation in the long run, a casino floor will not be enough.”
The report acknowledges Macau has not been immune from regional decline in luxury sales but suggests it can outgrow Hong Kong as the sector recovers. Bernstein notes Macau has more luxury stores than Las Vegas and sees opportunities to grow the “soft luxury” segment of clothing and accessories rather than watches and jewelry – Macau may have more Cartier than McDonald’s outlets. Luxury retailers get superior margins in Macau, according to Bernstein, luring them to the market. The report sees Macau’s growing visitation from beyond Guangdong and rising overnight stays boosting luxury retail.
In its report titled SAR Attractions, CLSA looks at making China’s two Special Administrative Regions, Hong Kong and Macau, great again. After loosened travel rules led to a 2003-13 “Golden Decade” of extraordinary growth, over the past two years mainland arrivals to Macau have stagnated.
CLSA Regional Head of Consumer and Gaming Research Aaron Fischer and colleagues suggest that the government go beyond declaring its goal of creating a “world center of tourism and leisure” and begin providing a map to get there, citing research showing mainlanders substituting domestic travel for Macau visits. The report says Macau needs more attractions beyond gaming and retail, more hotel rooms, more cooperation among casino operators to build the destination with the government – with walkways between Cotai casinos, for example – more transparency on table grants and what CLSA calls “earlier clarity on concession renewals,” as expirations begin in 2020. The investment bank also recommends cutting VIP revenue tax to keep Macau competitive with other destinations. CLSA admits some recommendations are longshots.
THE NEXT NORMAL
Back in the present, the holiday period plus Premier Li Keqiang’s visit to Macau and Typhoon Haima made October unique. Months ahead will better indicate whether Macau has turned the corner.
“Gaming revenues have stabilized but need to grow on a monthover-month, seasonally adjusted basis for investors to conclude a recovery is underway,” Wells Fargo’s McKnight, whose bank remains neutral on Macau gaming, says. “Visitation growth has been negative and needs to turn positive for new supply to be absorbed. China macro data has been mixed – growth has been slowing but in the short term, credit growth and house prices have picked up – investors are asking whether this is a short-term phenomenon or something that could be sustained. We estimate [Macau’s] advertised hotel rates are down 20% year on year in Q4 – reflecting the impact of additional supply in a slow demand growth environment.”
“It feels like there is a mass market recovery underway, although the true test is likely to be whether or not Parisian Macao grows the market,” Union Gaming’s Mr Govertsen says. “Simply put, the key will be growth. No more, no less. If the market continues to grow nicely – ie as good as, if not better than, September’s rate – then it is likely that investors will declare a recovery truly underway and we would expect upward pressure on certain stocks, especially those with an outsized mass market segment.”
University of Macau Associate Professor of Business Economics, Ricardo Siu, adds, “Technically speaking, November and December may likely show positive year-on-year growth because of the low bases of these months in 2015. Along with the overall change, I would watch changing VIP volume and the reaction from the government.”
Beyond that, the gaming expert says, “In the long-run, successful transition to the mass market with the right market positioning will be necessary for sustainable growth.”