Recovery will be slow
Two years ago at this time, Macau was flush. According to Casino.org, in 2014 the territory’s gaming industry was heading into a record-breaking first quarter in which it would rack up $12.6 billion in revenues, up almost 20 percent from the same period in 2013. At the time, Forbes called Macau “one of the world’s fastest growing economies”; as the world’s premier gaming destination by far, the city generated six times the gaming revenues achieved in second-place Las Vegas.
Fast-forward to January 2016. An historic downturn in the industry is well into its second year. And there’s no let-up in sight. As the Wall Street Journal bluntly reported, Macau has had a “rotten 2015.” Revenue in November was 16.43 billion patacas (US$2.06 billion), the lowest monthly figure since 2010, the Journal reported. When December’s numbers come out, full-year gaming revenue is expected to be down one-third to approximately $30 billion. Moreover, share values for the five major concessionaires dropped an average of 48 percent for the year.
The downturn began in June 2014, when Chinese President Xi Jinping’s anticorruption campaign sent VIP high rollers running for cover. Since then, Xi’s government has made it hard for the industry to find its footing, and its policies have deepened concerns the city may not experience the modest recovery predicted by some analysts this year. The policies include a smoking ban inside casinos; a 3 percent cap on new-to-market gaming tables; increased scrutiny of debit cards that many gamblers use to access cash; and a crackdown on junket runners. According to CLSA analyst Aaron Fischer, there has been an “evaporation” of high rollers in the last 18 months; those big-spending players were worth $10 billion to the city, he estimated.
The bad news coincides with billions of dollars’ worth of new supply coming online along the city’s Cotai Strip. In May, Galaxy Entertainment opened its Phase II and Broadway expansions. In late October, Melco Crown opened its $3.2 billion Studio City (notably, without a single VIP room). The Las Vegas Sands Corp., Wynn Resorts Ltd., MGM Resorts International and SJM Holdings Ltd. are all in some phase of developing multibillion-dollar resorts; most of them are expected to open by the end of 2018. Those bets were made when aces were high, but they’re all playing out at the nadir of the industry’s fortunes.
Observers and operators believe the market will right itself over time, especially as Macau’s non-gaming sector expands. Las Vegas Sands Corp. CEO Sheldon Adelson recently said, “We are at the beginning of the shift in the cycle from a recession-type economy to a bottoming out, and I think the economy will turn around.” But presently, non-gaming revenue is “simply not large enough” to compensate for the crash in gaming spend, according to Union Gaming Research. In fact, it dropped 19.5 percent in the third quarter or 2105, according to the city’s Statistics and Census Service.
Alvin Chau, head of junket operator Suncity, recently told the Macau Business Daily that Melco Crown’s Hollywood-themed Studio City opened without a VIP room because it is not yet licensed for one, not because the operator believed there is no market for VIPs.
“It is known that their license for VIP rooms hasn’t started,” he said. “I don’t believe a casino hotel can be completed without VIP tables. Overall, you won’t achieve diversified development by reducing the number of VIP rooms.”
At a recent ceremony marking the 16th anniversary of Macau’s return to China from Portugal, Chief Executive Fernando Chui Sai On said, “The development of Macau will still be affected by the complicated and ever-changing external environment. We believe opportunities always come with challenges. We are pleased that China’s Thirteenth Five-Year Plan clearly states the aim of fully leveraging Macau’s unique advantages, coupled with elevating Macau’s position and functions in national economic development, and opening up policy.”
Despite the recession, according to a September 2015 report from Fitch Ratings, it still the world’s No. 1 gaming destination, carries no debt, and also has a nice cushion—“in excess of 100 percent of gross domestic product,” the credit rater reported.
