Recession could lead to consolidation
Macau’s long economic downturn, now in its 18th consecutive month, may start to lighten soon, say analysts who have looked at average daily revenue for the first week of December. According to GGRAsia, Sanford C. Bernstein analysts led by Vitaly Umansky said the early December numbers showed a slight uptick over November, but the month overall will likely see a year-on-year decline of 23 percent to 28 percent.
The drop is not insignificant, but it actually may be encouraging in a jurisdiction anxious for relief, however slight. Monthly GGR in Macau has dropped in excess of 30 percent on a year-on-year basis throughout the recession. In November, GGR was down 32.3 percent to about MOP16.43 billion, and most analysts have been looking forward to monthly declines that are less than 30 percent.
“At current run rates, we expect the full-month December GGR to see a 23 percent year-on-year decline,” said Daiwa Securities analysts. And Carlo Santarelli of Deutsche Bank Securities said December “is tracking to a range for the month of down 23 percent to 25 percent.”
But the outlook is more bleak for third-party casinos in the territory, according to Union Gaming Securities Asia Ltd. “In our view, it will become increasingly more difficult for most of the third-party casinos to compete in the years ahead given their lack of amenities (and budgets) relative to the existing and next wave of Big 6 projects,” analyst Grant Govertsen wrote in an investor note.
The “Big 6” are the city’s six official casino concessionaires: Galaxy, Melco Crown, MGM China Holdings, Sands China, SJM Holdings and Wynn Macau. As explained by GGRAsia, third-party managed casinos or satellite casinos “piggyback” on the Big 6 licenses; presently there are 19 third-party casinos in Macau. Fifteen operate under SJM Holdings’ license; three under Galaxy Entertainment’s; and one under Melco Crown’s.
“Nearly all of these properties are, to put it mildly, much smaller and much less physically attractive than the properties already developed and being developed by concessionaires,” Govertsen wrote. “As Cotai continues to develop we would look for the Big 6 operators to pick off more market share from the third-party casinos.”
Emperor Entertainment, owner and operator of third-party casino property Grand Emperor Hotel, reported a 57.7 percent year-on-year decline in profits for the six months that ended September 30. In November, Kingston Financial Group reported a 38 percent year-on-year drop at its two third-party casinos. Those numbers have led Govertsen to anticipate possible mergers and acquisitions and consolidation in the market.
“We would not be surprised if some number of third-party casinos don’t survive the downturn and next wave of expansion,” Govertsen wrote. However, he added, “Even if cash flows dwindle to almost nothing, there is still a lot of value associated with these third-party casinos, namely the underlying land value of very scarce gaming-entitled and hotel-entitled land.”
The vanishing VIP class has also led to hard times for casino junket runners, who make their money lending to high rollers and arranging their travel and accommodations. These days, the junkets say they are collecting as little as 20 percent of the money they are owed compared to 2013, when 70 percent of loans were quickly repaid, said Kwok Chi-chung, president of Macau’s Association of Gaming & Entertainment.
Kwok told Bloomberg News, “Getting the money back is a bigger challenge now for junkets than before. With a longer payback period, junkets have less money to lend to new customers, and the business size is shrinking accordingly.”
Tony Tong, co-founder of Pacific Financial Services Ltd., said it’s “very difficult for junkets to collect debt in China,” and the process often requires “a lot of patience, begging and hassle.” The dearth of VIP players has compelled casinos to close at least 30 VIP rooms since July, Kwok said. “More VIP rooms will be shut. Quality will become the priority when it comes to lending, rather than quantity.”
But consolidation could benefit the junket business, said Umansky, “as it would create more liquid and professional junket operations.”
To boost the city’s fortunes, according to the Macau Business Daily,Secretary for Social Affairs and Culture Alexis Tam has revealed plans to boost tourism with ferry boat trips from the peninsula to Taipa and Coloane; showcasing the territory’s Portuguese culture; and shining a spotlight on its museums, restaurants and shops. Macau is also looking to increase its MICE business, and has already seen notable progress in that area. In the third quarter of 2105, attendance at meetings, incentives, conventions and exhibitions in the city rose almost 41 percent.
