True bottom expected in second half
Has Macau reached the depths of a yearlong recession? Analysts are once again saying the city’s gaming industry is nearing the end of its historic decline, and may soon begin to rebound. Other industry observers are less optimistic, and say the transition to Vegas-like economic diversity will take years. Meanwhile, a smoking ban, threatens to add more headaches for Macau operators, most of whom built partitioned smoking lounges on the casino floor when the initial ban was imposed.
According to GGRAsia, gross gaming revenue in Macau fell 37.1 percent year-on-year in May to about MOP20.35 billion (US$2.55 billion). “We expect margin compression to likely persist until industry GGR decline stabilizes in the latter part of 2015,” said analysts from the firm Sanford C. Bernstein. Bernstein lowered its 2015 GGR forecast for Macau to US$33 billion from US$35 billion—a 25 percent year-on-year drop. The firm predicts VIP revenue will decline by 35 percent, and mass-market play will drop by 10 percent.
Better news may be around the corner, some analysts add. Citigroup Inc. noted that May GGR rose 7 percent from the previous month. The Bernstein team added, “We expect to see a bottoming by the latter part of the year with rejuvenated growth beginning in 2016.”
Galaxy Entertainment Deputy Chairman Francis Lui recently said the same thing, telling Macau Business that casinos will rebound in the second half of this year. Galaxy just opened two new casino resorts, the first on the island since 2012. “We have entered a new era when the growth pattern in the past decade won’t work today,” Lui added. “That’s why we have put a lot of nongaming elements into the resort.”
Another sign of confidence in the jurisdiction: Bloomberg News said investors are buying casino stocks at a brisker pace “on signs of improvement” in the gaming sector. Shares of Wynn Resorts Ltd., MGM Resorts International and Las Vegas Sands Corp. rallied on the May numbers. But will mass-market gamblers ever be able to fully replace the revenue generated by high rollers? Bloomberg said maybe.
“At the city government’s behest, resorts are pursuing middle-class tourists, instead of high rollers, for what should be more consistent and sustainable growth,” Bloomberg Intelligence analyst Tim Craighead wrote on June 8. “Mass-market margins are three times wider, and most operators are shifting gambling tables to that segment.”
Deutsche Bank also saw light at the end of the tunnel. ‘While the (May) results aren’t exciting on a stand-alone basis, we believe there is some optimism one can take from segment trends resembling those of April on a year-on-year basis, despite similar comps,” according to the bank. “We view this as another sign of a forming bottom.”
June could tell the tale, said Union Gaming, calling it a “transitional” month. At the very least, “Trends should improve given the easier comparison to June 2014,” the gaming research firm said. New resorts on Cotai also should help. “We could see a small tailwind for the market, as new properties generally draw more customers.”
If the average daily gaming revenues from February through May (HK$652 million, or US$84.1 million) continues in June, total revenues for June will remain about HK$19.6 billion, a 26 percent decrease, Union Gaming says. But Deutsche Bank predicts a 33 percent decline in revenues in June due to a 38 percent drop in the VIP segment and 26.1 percent in mass floors.
For the long term, investment in the nongaming sector has become “the cost of staying in business in Macau,” CLSA analyst Aaron Fischer told the Economist. It all began last year, when Chinese President Xi Jinping laid down the law for casino operators and officials in Macau, saying an economic model that relied on a single industry was unsustainable. Xi kicked off a crackdown on graft and corruption that sent some VIP players running to other jurisdictions, and caused a number of junket operators to reduce their shops in Macau.
“There’s an emerging mid-income market on the Mainland,” Fischer said. “It’s now increasingly affordable for people to travel overseas. In terms of tapping the mid-income market, we are only scratching the surface.”
The transition should be helped by a regional rail network that will link Zhuhai, Jiangmen, Foshan and Guangzhou to Macau, and enable gamblers to make the trip in half an hour. The line is expected to be finished by 2018, Communist Party official Wang Jijun told the Macau Business Daily.
“When the railway reaches Zhuhai, it practically means it’s linked to Macau as well,” said Wang. “By then, Macau people would take around 20 minutes to reach Jiangmen.”
But it will take a long time for Macau to diversify its economy in the manner of Las Vegas. According to the Economist, statistics from the State Gaming Control Board in Nevada show that gaming accounted for 45.1 percent of the state’s total revenue in 2013, compared to just 10 percent in Macau. But operators say they’re getting with the program.
Galaxy’s Lui said his company’s two new resort offerings “underline the group’s commitment to help Macau fulfill its potential as a diversified economy and to develop and nurture local talent and local culture. When visitors come to Macau, they are not only seeking to participate in gaming. This is a major sea change in the ecosystem of Macao.”
But a smoking ban that may soon include Macau casinos will almost certainly hurt the bottom line. Macau Gaming Junket and Entertainment Association Chairman Kwok Chi Chung was quoted in the Asia Gaming Brief as saying a blanket smoking ban would be a “disastrous blow” to the gaming industry. MGM China CEO Grant Bowie also said casinos should be able to keep their smoking lounges. “We clearly support the initiatives of the government in terms of protecting the interest of the staff, and therefore, have supported the banning of smoking on the gaming floor,” he told TDM Macau. “But we would also suggest that we should allow people to smoke in smoking lounges (staffed by no employees).”
On the broader decline, Bowie said, “I think what everyone is now looking for is when the low revenue is stabilized, when we start to see growth. Clearly we’ve now gone for 12 months with declining revenues, but there are still early signs that the economic conditions in the region would suggest that we will return to growth.”
The ripple effect of what is happening in Macau continues to be felt throughout the rest of the Asia-Pacific region, reports the Straits Times. At least 17 new casinos are expected to open in the next five years, including six in Macau, three in South Korea and others in the Philippines, Australia, New Zealand and Russia’s Integrated Entertainment Zone. The boom can be attributed to a rise in travel among Chinese customers, the publication reported.
Thomas Arasi, president and COO of integrated casino-resort Solaire Manila, said the property expects to get its fair share of international gamblers, including VIPs. “It’s not easy to get people to come to the Philippines, but when they do, our sticky rate is as good as other properties because we give them the famous Filipino hospitality, convenience and reasonable gaming tax rates,” he said.
Japan also is working to open up a legal casino industry. Some estimates say the market could generate annual revenues of between $15 billion and $30 billion. But Professor Asit K. Biswas, of the Lee Kuan Yew School of Public Policy, said those figures
were “outlandish.”
“Where will the gamblers come from, and how will they get the money for gambling? The Japanese banks already have good money-laundering measures in place and these will only become tighter with time.”
Crown Resorts Chairman James Packer, who holds a 34 percent stake in Melco Crown, would not wager on the outcome in Macau. “I don’t think any of the operators could have predicted what has happened now,” he said. “As an Australian investor in China and Macau, it’s very hard to be critical of a corruption crackdown, when and how that ends is something that no one knows.”
Looking ahead, however, Packer said, “I think we’ve all got to be mindful of the fact that it’s been a terrific ride so far, and nothing is a straight line up.”
For the time being, a MERS scare also has been alleviated. Authorities have detected no case in Macau of the viral respiratory disease Middle East Respiratory Syndrome, says Secretary of Social Affairs and Culture Alexis Tam Chon Weng. “We’ve not seen any signs of an outbreak of MERS in Macau yet,” Tam told reporters. “At the moment, it is not necessary to issue an alert.”
