It’s been almost a year since Macau gross gaming revenues began their precipitous plunge. With revenues down almost 40 percent in 2015, the government is taking a renewed look at the industry and will launch a review to assess the health of the SAR resorts and what needs to be done to maintain revenues and jobs.
But even the review is cloaked in secrecy. There has been no announcement of who will conduct the review, what will be considered or what kind of action will be required following the report.
A week after Steve Wynn presented a grim picture of Macau and his company’s experience there, James Packer, the co-chairman of Melco Crown, joined in.
“The slowdown in Macau is more severe than any of the operators foresaw,” said Packer. “I don’t think anyone, 18 months ago, would have predicted what’s happened now.”
Steve Kent, gaming analyst for Goldman Sachs, issued a report that said there were no “silver bullets” to cure the ailments currently being suffered in Macau. Kent said the declines were “much more than everybody feared, and we do not see a turnaround for months, possibly quarters.”
Kent downgraded his projections for both Las Vegas Sands and Wynn Resorts because of their large exposure to the Macau market.
No Harm, No Foul?
At G2E Asia, a panel of gaming analysts primarily blamed a crackdown on corruption by the Chinese government and a resulting reluctance by gamblers to visit Macau.
“Until there’s a change in attitude by the government,” said Grant Govertson from Union Gaming, “players are not going to come back. They’re afraid of drawing attention to their activities, even if they’re not doing anything wrong. That’s going to take some time.”
Kent says the length and depth of the downturn surprised everyone.
“We stuck with our positive ratings, because we thought that at some point Macau would start to bottom out as the Chinese government’s anti-corruption program ran its course,” Kent said. “However, it now looks like a recovery will take longer.”
At the same time, says Morgan Stanley’s Praveen Choudhary, it wasn’t the intention of the central government to harm Macau.
“The corruption crackdown is simply an attempt to stop illegal activity that has been going on for years,” he says. “And things like the table cap are meant to encourage the development of non-gaming amenities.”
Packer agrees that there was no harm intended.
“As an Australian investor in China and Macau it’s very hard to be critical of a corruption crackdown. When and how that ends is something that no one knows,” he said.
One government policy that has clearly harmed casinos is a smoking ban. The government plans to implement a full smoking ban by the end of the year, which includes the VIP rooms where smoking is still permitted. It also will do away with smoking lounges on the casino floor, which have been erected to serve their smoking customers.
Govertson said Macau will undoubtedly follow other jurisdictions where smoking was banned and saw revenues decline by as much as 20 percent.
“If you say you have to physically leave the casino to go to the sidewalk to have a cigarette, that will interrupt game play and that will have a material impact on revenue,” he said.
Cotai: All Bets Are On
All six Macau casino operators are building new resorts in Cotai. With an unprecedented contraction in the market, some analysts are referring to the developments as a “bet” by operators that they can boost a sagging industry.
According to Bloomberg News, the concessionaires have bet a collective $26.6 billion that adding inventory can reverse the slump, which began last summer with a crackdown on money laundering and graft.
“It’s the opposite of textbook economic principles: More supply will mean more demand,” wrote Bloomberg.
The first bet will be placed this week, with the opening of Galaxy Entertainment’s Phase II expansion and Galaxy Broadway. Later this year, Melco Crown Entertainment Ltd. will finish its next resort, Studio City, complete with Asia’s tallest Ferris wheel. Sands China Ltd. will be next at the table with its Paris-themed property, or possible Wynn Palace, the second property for Wynn Resorts, will beat it to the punch.
The Galaxy openings “will be the first major test for the industry on whether new capacity will drive visitation and gaming revenue recovery,” said Macquarie Securities analyst Jamie Zhou. “The question now is what kind of customers they will bring and how much gaming revenue are they going to drive.”
In bad news for Galaxy, the Macau government denied its request for 400 tables in keeping with a citywide 3 percent annual cap on table growth. The Jornal Tribuna de Macau and the Macau Business Daily say the operator has asked for 444 slot machines, but there was no decision in place as of late last week. Galaxy can still install 400 tables in its two new developments (including Broadway Macau, the former Grand Waldo), but would have to decrease its inventory at StarWorld and Galaxy Macau Phase I.
The new resorts were in the planning or construction phases before the historic slump began. Now operators are hoping they will turn Macau from a gambling town for high rollers into a Vegas-style destination with attractions for mainstream tourists as well as mass-market gamblers. They are under order from Chinese President Xi Jinping to diversify the economy. Paradoxically, reported Bloomberg, by adding more nongaming amenities the operators hoped to get a more generous table-game allotment. But with the limit at the Galaxy properties suggests the government will be unlikely to go above the 3 percent cap.
Since mid-2014, Macau’s casino industry has shed more than $20 billion in value, and the downward trend is continuing. Fitch Ratings, which recently expressed confidence that the market would surge later this year, is joining the pessimists by predicting a drop of 29 percent in gross gaming revenue for 2015. Earlier, the agency had forecast a more bearable 22 percent.
Even so, Fitch said it is retaining Macau’s credit rating at AA- with a stable outlook, according to the Asia Gaming Brief.
“Our new forecast, which sees 2015 GGR falling to $31 billion, assumes daily GGR of MOP 650 million ($81.4 million) to MOP 680 million for the balance of the year, with the higher end of the range occurring toward the end of the year,” the note said. “The 2H15 improvement takes into account our opinion that the market is near the trough and that Galaxy Macau’s phase II opening on May 27, as well as Melco’s Studio City opening in 3Q15, will drive some incremental, albeit limited, growth.”
While many point to Las Vegas as an example of a jurisdiction that is thriving after beefing up its nongaming sector, Zhou pointed out that gambling accounts for more than 90 percent of casino operators’ revenue in Macau and only 37 percent in Las Vegas.
“Companies are spending all that big money on something that has yet to be proven to work in Macau,” Zhou said. “It proved to work in Vegas, but it took them 15 years—it’s going to take a long time for Macau to get there.”
Looking Up?
Richard Huang, an analyst with Nomura, said the bottom has not yet been achieved.
“We caution that Rome was not built in a day and we see no signs of a ‘V-shape’ recovery,” he says.
Still, Packer, whose company will open a new multi-billion-dollar resort later this year, Macau Studio City, is optimistic.
“The long-term macro picture for Macau is still incredibly exciting,” he says, pointing to infrastructure improvements such as light rail, more high-speed trains from major Chinese cities, the Hong Kong-Zhuhai-Macau bridge, and more capacity with other new resorts slated to open within the next three years.
“I think we’ve all got to be mindful of the fact that it’s been a terrific ride so far, and nothing is a straight line up,” he says.
The Macau government’s review of the casino industry will include an examination of the current holders of the casino concessions. Some have suggested the government will either add more casino operators or remove concessions from current owners to give to Chinese operators. A report authored by gaming experts I. Nelson Rose and Professor Jorge Godinho suggests that uncertainty be clarified.
“If you lend large sums of money, hundreds of millions of dollars to a casino, you want to know that they’re going to be in business when they are supposed to pay it back in 20 years. So really the decision has to be made now,” he said. “I don’t see how they can put it off anymore. If they don’t make a decision really soon about whether they’re going to renew these contracts, I think there’s going to be a problem with getting lenders, the bondholders to lend them money, because they want to know that they’re going to be paid back.”
If there were problems in the Asian market, you couldn’t have seen it at G2E Asia. Attendance surged with double-digit increases and a record number of new exhibitors signed up to display their goods and services to the Asian gaming market.
Organized by the American Gaming Association and Reed Exhibitions, G2E Asia has clearly become the leading event in the gaming industry for nine years running.
