From its incredible rise to the top of world gaming to the sudden crash that few saw coming, Macau is rising once more from the ashes – and the long-term outlook is a bright one. By Ben Blaschke
“Things are never as good as they feel and never as bad as they seem.”
It’s a quote that could very well have been uttered on behalf of the Macau gaming industry. Certainly Macau’s casino operators didn’t see any signs of the looming crash when gross gaming revenue (GGR) hit a record US$4.8 billion for the month of February 2014.
In the 10 years between Macau’s first integrated resort – Sands Macao – opening its doors mid-2004 and the city’s 2013 peak, GGR grew by a staggering 1,165% from US$3.58 billion in 2003 to US$45.27 billion in 2013. That figure towered more than seven times higher than its famous cousin in Las Vegas, which recorded 2013 revenues of US$7.3 million.
Yet just three short years later, Macau’s GGR has fallen by half, down to US$27.95 billion in 2016 following China’s ongoing anti-corruption campaign and the crackdown on capital flight. For investors who not so long ago were laughing all the way to the bank, stocks have fallen by as much as 80% at their lowest ebb with most still more than 50% down today despite recent stabilization.
It was these dramatic falls that prompted several international media outlets to rather prematurely read the Macau gaming industry its rites, with one online site naming their industry observations, “Casino death watch.”
But just as the good times couldn’t last forever, the reality of Macau’s downturn was far from a fatality, a fact highlighted by the city’s recent recovery which has seen GGR rise year-on-year for the past five months – up 1.1% in August, 7.4% in September, 8.8% in October, 14.4% in November and 8% in December. August’s rise ended a run of 26 months of consecutive decline.
And although revenue still lingers far below those lofty heights of 2013 and early 2014, the reality is that Macau’s latest upward trend promises to present itself in a far more sustainable manner than its previous decade-long boom. Welcome to the new Macau.
“The Macau of old had an over-focus on VIP gaming and its lack of diversity in product – both non-gaming and gaming – and customer segment meant that it was bound to hit a bottleneck in growth,” says Professor Desmond Lam, Acting Program Director of Hospitality and Gaming Management at the University of Macau’s Faculty of Business Administration. “The model was simply unsustainable and, for certain, not what the Chinese Central and Macau governments wanted.
“I think it is ridiculous to expect sustained high growth rate in this business, as in the past. At the same time it is hard to picture that someone would say that Macau has crashed and burned, never to return to its glory days. Macau’s future is bright and as we move to change the models of doing business and innovate, growth will continue to return.”
As Union Gaming analyst Grant Govertsen explains, the severity of Macau’s slide in recent years was the result of a perfect storm as China’s ant-graft campaign combined with a range of external factors slammed on the brakes.
“With the benefit of hindsight, we can say the downturn was driven by a confluence of factors – many of which hit the market around the same time,” Govertsen says. “First and foremost the anti-corruption campaign in China was likely the largest contributor to the downturn and the market is still feeling the effects, but there were many other issues that impacted the market, including the ban on proxy betting, increased scrutiny of financial transactions, transit visa restrictions, the mass market smoking ban, political protests in Hong Kong and more.
“We are now, seemingly, in a mass-market led recovery, which we think will generally be supported by government policy to encourage mass market visitation.”
Indeed, it is the mass market that holds the key to Macau’s future – a fact that the city’s six concessionaires would almost certainly have scoffed at had you suggested as much at the height of their good fortune.
Consider this. In February 2014, Macau’s record month, VIP revenue accounted for 69% of total GGR or just a fraction under US$30 billion in real terms.
That’s a hefty chunk, so you can understand the concerns of operators given that it is the VIP segment that has suffered most from China’s crackdown. As of 2016, VIP has fallen to around half of total GGR, roughly US$15 billion.
In its place, the government has been pushing for mass market to take its place with operators urged to provide more non-gaming facilities in their integrated resorts to appeal to tourists over those simply wanting to gamble.
Of course, there has been plenty of skepticism along the way. In August 2015, Melco-Crown CEO and Chairman Lawrence Ho famously told the Macau Daily Times that non-gaming would always be a loss-maker.
“Our vision has always been more innovative, integrated resorts with these amazing non-gaming attractions, but at the same time, I don’t want people to think, ‘These guys think non-gaming is going to make a whole lot of money.’ It’s not,” Mr Ho said at the time.
“The cold hard truth is, non-gaming doesn’t make any money and it will never make any money. For all the foolish people out there that think non-gaming is going to save the day, it’s not.”
But there are considerable upsides to drawing a mass market-dominated crowd – most notably the fact that, while their individual spend is much smaller than that of VIP players, mass table hold for operators is four times higher.
“The reality is that the Big 6 operators don’t need to focus on VIP like they used to because of the fact that mass market has been ordained as the future of Macau and because it is significantly more profitable,” says Govertsen. “While mass market is, for sure, a harder business to operate in that we’re talking about millions of customers instead of thousands, it is much more sustainable and much more predictable.
“A stable and visible revenue and profit stream is highly valuable in the eyes of investors. The key, as always, will be putting the pieces in place to make sure the mass market recovery is kept on track.
“This not only includes various infrastructure improvements, but the trial and error necessary on the part of the Big 6 operators to come up with amenities and ideas that attract mainland customers again and again. They’ve figured out the formula in Las Vegas and now they need to figure out the formula in Macau.”
Govertsen also believes that official data released by Macau’s Gaming Inspection, and Coordination Bureau (DICJ) showing a VIPled recovery for the last quarter of 2016 – with VIP up 13% year-onyear and mass up 8% – is misleading.
In a 16 January note, Govertsen stated that “VIP was not the primary driver of growth in 4Q16. It cannot be stressed enough that the headline growth rates in 4Q16, which showed VIP (+13% yearon-year) growing significantly faster than mass tables (+8% year-onyear) are, simply put, backwards.
“The reality is going to be a lot closer to VIP +7% year-on-year and mass +13% year-on-year after we get the unadjusted data from the Big 6 operators. In other words, and contrary to misconstrued weekly data points, the strength seen in 4Q16 was not primarily driven by VIP. It was driven by mass.
“This is very important in the context of what we see as a sustainable mass market led recovery.”
Morgan Stanley’s Praveen Choudhary and Alex Poon also point out that operators must forget about the giddy heights of 2013 and recognize this new way of doing business.
“The mix is changing and mass is becoming a bigger proportion of the revenue, thus margin is improving,” they explain, adding that while they expect VIP to grow in the coming years, mass will grow faster.
“VIP gaming by definition is volatile and driven by a select group of gamblers. It remains unpredictable, although recent transaction volume in the China property market is supportive of the current VIP business. We predict 6% VIP revenue growth in 2017 as against 11% for mass.”
There is one more key reason to feel good about this latest mass market trend. As the DICJ’s figures show, Macau’s total GGR for 2016 fell by 3.3% from 2015 levels. However, most of those losses were accrued in the first half of the year.
In fact, a closer look at average GGR per day shows revenue increasing each and every month from June through December 2016, with the exception of October, an outlier due to the Chinese National Day holiday. The monthly figures are as follows:
MOP$529 million (per day)
Macau’s GGR fell 13% year-on-year in 1Q16 and 9% in 2Q16 but then rose 1% in 3Q16 and was up 12% in 4Q16.
As was widely hoped, it seems that new supply via the opening of Wynn Palace and The Parisian in August and September last year respectively has provided a welcome boost, primarily in the shape of their 4,700 hotel rooms. In total, Macau now has 8,269 more rooms than it did at the start of 2015 with Galaxy Phase 2, Broadway Macau and Studio City having also opened for business since then.
The result has been a much brighter outlook for Macau through 2017 and beyond.
“While stabilization in GGR, especially in Mass, had been a theme we have been preaching since late 2015, late spring 2016 finally brought growth in mass and more recently VIP has been showing positive signs with growth evident since September,” offer Bernstein’s Vitaly Umansky, Zhen Gong and Yang Xie. “For 2017, we estimate mass GGR growth of 12%, VIP growth of 3% and EBITDA growth of 14%. The long-term growth prospects for the industry remain attractive – principally in mass.”
Adds Morgan Stanley’s Praveen Choudhary and Alex Poon, “We think mass revenue can sustain at high single-digit growth in the medium term driven by infrastructure, visitation, spending per visitor (mass revenue per Chinese visitor +2% year to October), overnight visitors (+10% year to October), increased focus of the casino operators to develop premium mass/direct customers, diversification and increase in supply of non-gaming amenities.”
“Infrastructure is key. The Taipa ferry terminal, new bridge from Hong Kong, the monorail and the connection with Hengqin (all to be either built or upgraded within the next three years) are all important to drive visitation further.
“Visitation numbers have been flattish over the last two years since none of these significant infrastructure projects were completed, plus the smoking ban was introduced.
“On top of that, the anti-graft measures didn’t help. However, the underlying trend is that overnight visitors are growing at 10% while day trippers have been declining by the same amount. This is good news as the quality of customer is improving.”
This is not the same Macau that existed previously. The good old days, as some like to call them, are gone. But, ultimately, that might prove to be the best thing that’s happened to Macau in many years.
“The good old days are not going to return and if they do, we should be worried about sustainability and the next round of pain,” says Professor Lam.
“But I know that most operators are serious about finding ways to innovate. Today there is greater openness and transparency of gaming activities in the mass market which is, by itself, good publicity, good public relations and good business.
“The market today feels revitalized and more optimistic.”