Inside Asian Gaming

INSIDE ASIAN GAMING | October 2012 10 Cover Story because of what we’ve been reading, not because those high-rollers are going away, but because there are somanymore Chinese who live and work in the real world, and as they become more affluent, and outbound travel becomes steadily less restrictive, they’re visiting and spending in their own way in increasing numbers. Macau’s casinos, in turn, are getting better at identifying these people and their preferences to better provide their immense numbers with a bang for the buck that makes them want to come back and spend more. This “mass market,” says Lui Che Woo, the Hong Kong construction magnate and founder and chairman of Galaxy Entertainment Group, one of the leaders in this transformation, “is now the market’s growth engine.” From the standpoint of Galaxy’s growth prospects and profitability, and those of the other five operators, and ultimately of the value of their collective equity, it is the best of all worlds, one that is perhaps drawing Macau closer to the low-roller Vegas model it presumably left behind. Not that the differences aren’t stark. Gambling generates less than half of total revenues on the Las Vegas Strip. In Macau it accounts for more than 95%, and most of it comes from the aforementioned high rollers, 69.5% of it, averaged over the last five years, according to results published by the government. Total gaming revenue over these years has grown at an annual rate of 26.4%. This used to astound outsiders before it became commonplace. Anyway, as you’d expect, it’s largely been driven by China’s super-rich—“VIP” play, in the parlance of the industry, which grew at a 28.6% annual rate over the same period. Actually, it grew by 70% in 2010 and 44.3% last year, official results show, as the sector broke loose of historical trends to account for 72% of total revenues in 2010, 73.2% in 2011. The latter year saw total gaming revenue hit US$33.5 billion. That’s about five Las Vegas Strips. If you’re thinking that at this clip the market was due to cool off you’d be correct, and investors spoiled by those heady days have been having an uncomfortable time of it in 2012, with total revenue growth slowing to 19.8% year on year through the first half and bumping along since May at rather prosaic average gains of 6.6% a month. But then it would take about 70.7 billion Macau patacas at this point, or almost US$9 billion, to repeat the 26.4% growth rate of the last five years. That’s a lot of VIPs, even for China. Amazingly, it did happen in 2011, but it’s not likely to happen again anytime soon, not according to current forecasts for 2013 and beyond. ‘Looking for Help’ The culprit in this year’s slowdown has been a softness in growth at that high end. This became apparent in the latter half of 2011 and manifested itself fully in May, when growth year on year slumped to 7.3%, the lowest rate the market has seen since the dark days of the 2008-09 financial crisis. To be fair, May ran into the twin obstacles of an unfavorable calendar and a tough comparison against abnormally high house luck the year before, but that was lost in the headlines and the ensuing rush for the exits, which also obscured the fact that it was a banner month for rolling chip turnover (the term for the volume of non-negotiable “dead” chips wagered in the casinos’ private VIP salons). In fact, it was the second-best revenue month the market had experienced up to that time. Yet, rolling chip volume has slowed this year,dramaticallysoinsomecases,compared with the last three years. The pace through the first half implies a gain in VIP revenue of only 7% this year, which would be the lowest since 2009. Analysts have advanced several reasons for this, most of them having to do with the economic and political dynamics of mainland China, the source of around 60% It would take about 70.7 billion Macau patacas at this point, or almost US$9 billion, to repeat the 26.4% growth rate of the last five years. That’s a lot of VIPs, even for China. Amazingly, it did happen in 2011, but it’s not likely to happen again anytime soon, not according to current forecasts for 2013 and beyond. The “mass market,” says Lui Che Woo, founder and chairman of Galaxy Entertainment Group, “is now the market’s growth engine.”