Another VIP room closes
First-quarter numbers are in from Macau, and the results are—so-so. According to a report in Forbes, figures from the city’s Gaming Inspection and Coordination Bureau show Macau was down 13.3 percent from 2015.
The numbers demonstrate “diminishing negatives,” said JP Morgan analysts DS Kim and Daisy Lu; the ongoing decline confirms that a turnaround in the recession-battered city is not on the near horizon. But Union Gaming’s Grant Govertsen pointed out that Q1 was the third consecutive quarter where mass revenue represented a majority of Macau’s total, contributing about 53 percent of all gaming revenue, the magazine reported.
“Despite the continued year-on-year declines in total GGR,” in Govertsen’s opinion, “the notably better mix of business within the total number—driven by higher-margin, higher-visibility mass—helps support the recent rally in shares.” And Sanford Bernstein analysts pointed out that while Macau’s overall visitor numbers are in decline, overnight visitation is up.
However, new supply on the Cotai Strip has pushed down room rates, which are 18 percent lower on average than they were in the fourth quarter of 2015, and local resorts will cut room prices by up to 30 percent to remain competitive on Labor Day weekend, reported the Hong Kong Economic Journal. Karen Tang of Deutsche Bank foresees an all-out price war as the city contends with five new hotels open for business in less than a year, with a total of more than 3,500 new rooms.
The same is true for the gaming side. Fitch Senior Director Alex Bumazhny says gaming revenue in the town will drop about 5 percent this year from 2015. “We expect some marginal growth going forward, but as bigger projects open, there’s some danger that there could be cannibalization for existing properties,” he said.
In another sign of the times, there are far fewer VIPs in a town that once was dominated by high-roller trade; the loss of that coveted demographic has caused yet another junket room to shut down, reports CalvinAyre.com. The Cali Group shut down a VIP room at MGM Macau, following the closure in February of two other Cali rooms, operating out of the Grand Lisboa and City of Dreams.
Kwok Chi Chung, president of the Association of Gaming and Entertainment Promoters of Macau, says more closures may be on the way. “The current situation is like the aftershocks following an earthquake,” Chung recently said. “After some time, some VIP rooms may have seen the number of customers that they receive is not enough to support their operations. As such, they may prefer shifting some of their resources and focuses from Macau to other places in order to decrease their operational costs here.”
Govertsen said the same thing in a February note that predicted the junket industry “will continue to see further closures and consolidation, and … VIP gross gaming revenue (declining) 12 percent in 2016.”
The government has put a lot of pressure on the junkets, and is now working on a new proposal that would increase capital requirements for VIP organizers. Alvin Chau Cheok Wa, owner and chairman of the city’s largest junket operator, Suncity Group Ltd., has said he agrees with higher standards for the industry. “It is necessary to raise the bar for (junkets) to enter,” he said. According to the Macau Business Daily, Chau also agrees it is important to conduct background checks on gaming promoters and demand a more transparent process. Macau’s junket sector reportedly has asked the SAR government to raise the capital requirements for new junket promoters to MOP10 million (US$1.25 million) from the current MOP 100,000. New promoters also would have to include at least one Macau resident among its shareholders.
Daiwa Securities Group Inc. says Melco Crown and Wynn Macau are more exposed to debt-ridden gaming promoters, according to Bloomberg News. Daiwa’s Jamie Soo said the high-level, high-risk gaming promoters are struggling with at least HK$30 billion ($3.9 billion) in bad debt—an estimate Bloomberg called “conservative.”
“This problem of rising bad debts continues to be a major issue in Macau, and is among the key drivers for the successive junket mergers and closures that we continue to see today,” Soo wrote in a note to investors. Wynn and Melco hold the “riskiest slice of the industry’s junket business,” he wrote.
Macau’s government has implemented more stringent oversight for junkets in the wake of two major thefts in the sector—an alleged multimillion-dollar heist by a cage cashier at a Dore Entertainment VIP room at Wynn Macau last September, and the alleged fraud case at L’Arc Macau, an SJM satellite casino, involving funds of HKD99.7 million (US$12.9 million). Thirty-five junket operators were recently denied license renewals due to their failure to submit financial records. The revised guidelines also require junkets to submit regular detailed accounting reports and identify, in detail, all key financial personnel.
All eyes remain on Macau—still the world’s leading gaming destination by far—as it scrambles to do like Las Vegas and diversify its gaming-centric economy. In 2014, reported Fitch Ratings in an August 2015 report, less than 10 percent of gross revenues generated at Macau resorts came from non-gaming activities, as compared to 60 percent in Vegas. It’s especially important to the Chinese territory, which faces looming competition in South Korea, Japan and Southeast Asia, said Alex Wong of Ample Capital Ltd.
“(Macau casino) stocks have been down so much over the last year, so people were expecting things cannot get worse,” said Wong. “I don’t think we would see further momentum from here.”
A locally based five-year plan has set out a goal for Macau’s gaming industry: to generate at least 9 percent of total revenues from non-gaming attractions by 2020, and become a “world center of tourism and leisure.” The government says the city’s resorts generated just 6.6 percent from non-gaming in 2014.
On a positive note, Bloomberg News reports that Galaxy Entertainment Group Ltd.—which opened its Phase I and Broadway resorts on Cotai in 2015—posted its first quarterly profit gain in more than a year as those resorts pulled more casual gamblers and tourists. First-quarter EBITDA rose 6 percent to HK$2.4 billion (US$309 million), and analysts projected profit of HK$2.47 billion. It was Galaxy’s first year-on-year profit gain since a 1 percent increase in the third quarter of 2014.
The “solid” results on Cotai “should drive best-in-class profit momentum,” said DS Kim, an analyst at JPMorgan Chase & Co. in Hong Kong. He said the new resorts enabled Galaxy to increase market share and improve its mass-market and non-gaming businesses. Mass revenue came in at HK$5 billion, up 2 percent over the last quarter, and 17 percent year-on-year. Tellingly, VIP revenues at the Galaxy properties were down by the exact same amount—17 percent year-on-year.
