WEEKLY FEATURE: Maybe Next Year in Macau

Macau, the world’s foremost gaming destination now mired in a two-year decline, won’t bounce back anytime soon. A new financial forecast says GDP in the recession-battered market will contract through 2016. Rapid Cotai expansion, the Chinese corruption crackdown and increased regional competition have still yet to run their course.

Bring on the MICE

London’s Economist Intelligence Unit has good news and bad news for Macau. According to a report, gross domestic product for the Chinese territory will continue to shrink throughout 2016, albeit at a much slower rate than in 2015, the worst year of a two-year economic downturn. But gains in 2017 will “nearly offset” this year’s losses, the publication reported.

The Macau News says the city has learned a lot during the recession—for one thing, the recovery would have been far easier and quicker if the city had welcomed more meetings, incentives, conferences and exhibitions, and invested more heavily in its transportation infrastructure.

Development of the MICE sector is a priority for Macau, along with mainstream, mass-market gaming and attractions, as the jurisdiction slowly shifts gears from a VIP-reliant system to a more diversified destination.

The EIU said MICE did not grow in the first quarter of 2016, but actually shrank by 20 percent year-on-year fewer than 200 events that brought less than 125,000 attendees to Macau. “Such events will not replace gambling-oriented tourism expenditure in 2016-2017,” the report said. “The industry remains small, attracting a trickle of visitors and revenue.” Sands China leads the pack when it comes to MICE amenities, with more than 1.6 million square feet of meeting and convention space available over three Cotai properties, CND reported. Attendance increased for all of them in 2015.

But gaming will remain “the dominant sector for the foreseeable future,” according to the EIU, and the debut of several more resorts in late 2016 and 2017 is expected to grow the GDP.

Not everyone takes a bright view of four new megaresorts on the Cotai Strip. The openings of Wynn Macau’s $4.2 billion Wynn Palace, MGM China’s $3.1 billion MGM Cotai, Sands China’s $2.7 billion Parisian Macao, and SJM Holdings’ Lisboa Palace could lead to oversupply at the worst time, in the midst of an historic slump. With a new light rail system not due for completion until 2019, getting around may also be difficult.

For example, Japanese brokerage Nomura points out that getting walk-in customers to the $4.2 billion Wynn Palace “could be challenging,” to say the least. “Macau is hot and muggy. It could take 20 minutes to hoof it from the Venetian Macao to the Palace.” Wynn plans to compensate by offering shuttles that link the new resort to the Border Gate checkpoint, the main access point between Macau and mainland China, and from Macau’s two ferry terminals, according to GGRAsia.

The construction of the Taipa section of the rail system also has been delayed until 2019.

Nomura said some older, “less iconic” properties like MPEL’s City of Dreams and Sands Cotai Central are most at risk of share losses as new, swanky casinos open.

“We believe each could lose at least 100 basis points of share over the next 12 months to Wynn Palace, the Parisian, and MGM Cotai,” wrote the Nomura team.

Analysts at Sanford C. Bernstein add that Macau’s ADR trends slowed in the third week of June as expected following strong performance in the second week, reported Asia Gaming Brief. “Our channel checks indicate that the MTD VIP hold rate remained below normal and that last week also experienced some slowdown in both the VIP and premium mass segments due to some diversion of gaming demand from the Euro Cup,” said the brokerage.

Assuming an ADR of MOP 500-560 million for the rest of June, GGR would come in at MOP 15.6-16.3 billion for a year-on-year decline of 6 percent to 10 percent, said Bernstein.

In other Macau news, the ban on proxy bets, the specter of a full smoking ban and other crackdowns continue to exert downward pressure on the gaming industry. A Bloomberg News report indicates Macau’s Gaming Inspection and Coordination Bureau, or DICJ, said it will “complete supplementary laws for violations and related penalties that weren’t previously included, amend outdated rules, and bring in new regulations” to rein in phone bets made in VIP rooms.

New penalties “will further hurt the revenue of the struggling industry in the short term,” said Daiwa Capital Markets Hong Kong Ltd. analyst Jamie Soo. The jurisdiction will essentially go from verbal warnings to fines and other sanctions for a practice that contributes about 20 percent of junket promoters’ revenue, Soo told Bloomberg. In Singapore, which established new rules last year against phone betting, violators face fines of up to SGD5,000 (US$3,700) and six months in jail for the bettor, and as much as SGD200,000 and up to five years in jail for the facilitator.

Finally, the city’s horse betting industry also continues to contract, according to AGB. Angela Leong On Kei, vice chairwoman of Macau Horse Racing Co. Ltd. hopes more entertainment and other attractions at the Macau Jockey Club could raise revenues there. “We have given certain pressure to the club’s chief executive, telling him to… think about how we can introduce more diversified offers to improve the revenues,” said Leong. “We hope to bring out more activities as well. But currently, we haven’t come up with a certain proposal,” she added.

According to the DICJ, the Jockey Club reported only MOP 36 million (US$4.5 million) in gross revenue in the first quarter, down 33 percent year-on-year. The greyhound racing industry is in similar straits. Some are now calling for the closure of the Macau Canidrome. “Times have changed. The Canidrome doesn’t have a reason to exist anymore. It doesn’t produce profit, so it doesn’t make sense,” said Miguel Senna Fernandes, president of the community group Associação dos Macaenses.

Meanwhile, the Motley Fool has floated Saipan as a possible successor to Macau, saying its proximity to the Chinese Mainland would allow junkets to “entice high rollers” to its gaming floors. There’s one hitch, however: Saipan currently has just one casino operator, Best Sunshine International, a subsidiary of Imperial Pacific International Holdings, and it is currently running a temporary casino, sans hotel (See the GGB Podcast this week with International Pacific CEO Mark Brown).

That doesn’t mean things couldn’t change. The incentives may be strong. Bloomberg reported that the casino generated $62 million on average each month in the first quarter, up 36 percent from the last two months of 2015, while the rolling chip program grew by 69 percent in April alone. A five-star hotel will open on Saipan in early 2017. In Macau, though hotel occupancy was healthy for May, at almost 82 percent, average room rates were down in 1.4 percent from April.