FANTINI’S FINANCE: Bottoming Out in Macau

It’s old news now, but the steep decline of gaming revenue in Macau continues. But has it bottomed out? What impact have two new resorts had on the SAR? And what are the prospects for next year?

While Macau’s government has made the biggest headlines with predictions that gaming revenues will drop in the mid-teens next year, there are, in fact, glimmers of better times ahead.

Table game revenues have pretty much flattened out in the past couple of months even though comparisons to last year remain negative.

Indeed, much of the government’s prediction isn’t that revenues will decline from their current levels, but that they will decline year-over-year. That effect should gradually fade away.

And, in recent weeks, we’ve seen some week-over-week revenue gains.

So, if Macau has essentially bottomed, where do we go from here?

Not up very much. At least not for a while.

The problems remain serious:

New capacity is coming into Macau with concerns that it will do more to cannibalize than grow the market. So far, that appears to have been the case.

Galaxy Phase II opened in May and neither stemmed the city’s downward trend nor gave Galaxy much market share growth.

Melco Crown has opened Studio City with great fanfare over its non-gaming amenities. And those amenities do appear to be drawing visitors, but aren’t doing much for gaming revenues. MPEL, which had 14.3 percent table game market share before Studio City opened, has had around 15 percent since, a less than 5 percent increase.

The government also appears to have set its precedent for how it will handle the four other mega resorts opening—Wynn Palace, Parisian and MGM Cotai next year, and SJM’s Lisboa Palace in 2018—when it awarded 250 gaming tables to both Galaxy II and Studio City.

That is an appreciable number of tables, and given the weakness in the market maybe too many, but it is not the 400-plus that the mega resorts’ multi-billion dollar price tags were premised on.

So, the question becomes who does best in this environment. Cases can be made for Wynn, MGM, Las Vegas Sands and MPEL.

The argument for Wynn is that the company’s property is so attractive that it enjoys enormous fair share and that translating that share to the new capacity brought by Wynn Palace makes for a big increase in business.

MGM’s case is even simpler. Cotai will more quadruple hotel capacity, hence dramatically increase business.

Las Vegas Sands’ case is that its huge hotel inventory, which will reach 13,000 rooms, allows it to benefit when the city is at capacity, that the Parisian will be a must-see property, and that the company has mastered the art meetings and tourism businesses.

MPEL’s story is similar to LVS’ as it touts non-gaming amenities and a pipeline of growth projects.

Unfortunately, in a static market, not everyone can be a winner by adding capacity so we’ll have to see how Macau plays out.

The glass-half full is that the market is stabilizing and should resume growth even though the junket business probably is permanently impaired. The glass half-empty is that the new customers coming to Macau will grow in number, but will spend less than the high rollers they replace.

Likewise, future events can be mixed.

Bulls will point to the new ferry terminal that will connect Hong Kong to Cotai, the continuing development of adjacent Hengqin Island, a seemingly more accommodative government, and evidence that the anti-corruption campaign has done its damage and the stigma among wealthy Chinese of going to Macau will dissipate.

Bears will point to the possibility of a complete smoking ban, continued tightening of junket and money laundering rules, and the renegotiation of gaming concessions later in the decade.

In other words, there are a lot of major issues and trends to be resolved both in the properties and in the halls of government before we get a clear picture of the future of Macau gaming operators.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.