Long road to diversification in the city
Two lavish resorts will open on Macau’s Cotai Strip this summer, with another to follow next year. But steep declines in the gaming sector and leaner spending by tourists could lead to a loss of business at some existing properties, according to analysts.
“In Macau, 2016 should be relatively stable in terms of the top line, but we expect to see some cannibalization from new Cotai openings,” wrote Alex Bumazhny, Fitch senior director for gaming for the credit rating agency.
“Softness in the VIP market and further depreciation of the yuan may challenge Macau’s year-over-year comparisons,” he continued, “but we do not expect the broader economic slowdown in China to have a material impact on visitation.
Gaming revenues in the world’s premier casino destination have fallen on a year-on-year basis since June 2014, for 22 consecutive months of decline. The recession was a response to tougher scrutiny of money laundering and graft and a softer economy in Mainland China.
Morgan Stanley agrees Macau’s casino industry faces a risk of overcapacity in 2017, reported GGRAsia. “Stable demand is facing significant capacity addition (6,000 rooms and 750 new tables) between the third quarter of 2016 and the first quarter of 2017. This could result in either cannibalization or rise in competition—thus, margin erosion,” wrote analysts Praveen K. Choudhary, Alex Poon and Thomas Allen.
Projects that will launch in the next year include the US$4.1 billion Wynn Palace, which is expected to open in August, after two delays; the $2.7 billion Parisian Macao, a Sands China property; and the $3.1 billion MGM Cotai.
Bernstein predicts the Macau gaming industry will remain “volatile over the near-term,” but expects the jurisdiction to grow in time, “driven by the paradigm shift from VIP to mass.” Mass gaming “will be the driver of rejuvenated growth beginning in 2016 and continuing through the rest of the decade,” the agency wrote, helped by “improvements in transportation infrastructure and the opening of large scale integrated resorts between 2015 (and) 2018.”
The group “remains inclined towards Sands China (due to mass dominance, critical mass on Cotai and focus on return of capital)” and ranks the group “outperform,” along with Melco Crown, Wynn Macau, MGM China and Galaxy. It ranked SJM “market-perform.”
April started weak, with GGR for the first 10 days amounting to MOP5.5 billion (US$688 million), for an implied average daily rate of MOP550 million, compared to an ADR of MOP580 million in March and MOP673 million in February. Bernstein said April was “weaker than expected, particularly in light of two weekends being captured during this period.” If their predictions prove correct, the month will end with a year-on-year decline of 11 percent to 14 percent.
In its note, Morgan Stanley the GGR trend “has stabilized, but without improved visitation, the growth outlook is still anemic. Demand weakness is visible in the 20 percent year-on-year drop in hotel room rates.”
A planned smoking ban that will include VIP rooms as well as mass floors is not likely to have a significant impact on revenues. A Bernstein survey of 1,200 Chinese tourists showed that almost half of visitors claimed not to smoke at all, and 23 percent do not smoke or seldom smoke at gaming tables.
“As such, although an expanded smoking ban may have some negative impact on GGR, the magnitude of such impact would likely not be significant,” said Bernstein’s analysts.
“We believe the key would be for the government to allow sufficient lead time for casinos to adjust for the policy change, which may include installation of smoking balconies if feasible and routing to outdoor areas, as well as communicating with customers about the change. Given the recent development in Macau gaming market and government policy direction, we believe there is limited risk of implementing a full smoking ban in the near term,” the note added.
Despite the fears of oversupply in the jurisdiction, Macau’s Secretary for Economy and Finance, Lionel Leong Vai Tac says existing legislation does not bar casinos in Coloane, an area next door to Cotai that has been called “the green lung,” because it’s the only major part of the city without a casino, according to GGRAsia. A luxury hotel called the 13 is now under construction on the Cotai-Coloane border and is scheduled to open in late summer. The hotel is owned by Hong Kong-listed Louis XIII Holdings Ltd., and though regulators have received no request for gaming at the property, plainly it is a possibility in the vicinity.
Macau Chief Executive Fernando Chui Sai On has said the city’s administration would continue to promote development of non-gaming elements at the new casino resorts that are being opened on Cotai between now and the end of 2017. Earlier this month, Yao Jian, deputy director of the Central People’s Government Liaison Office in Macau, said Beijing wants to see more leisure and business visitors to Macau, including “more convention and exhibition visitors and more coming here for a vacation with their families.”
In 2014, before the historic downturn, less than 10 percent of GGR in Macau came from non-gaming activities, said Fitch Ratings in a report last summer.
And in a note this month, Wells Fargo said, “In Las Vegas, gaming revenue is just one component—or just over 30 percent—of a typical Strip casino’s total revenue.”
Wells Fargo analysts predict that the evolution of Macau “into a less gaming-centric destination will be an extremely slow and arduous process.”
