GGRAsia – 2016: rise of the Asian mass-market casino resort?

2016: rise of the Asian mass-market casino resort?

Dec 31, 2015 Newsdesk Features, Latest News, World

The year 2016 could see the coming of age of “destination resorts” for the Asia Pacific casino industry, says an experienced observer of regional markets.

“The equities of the larger cap[italisation] properties that have been reliant on the Chinese junket market are all down,” notes Joe Pisano, founder and chief executive of Jade Entertainment and Gaming Technologies Inc, a Manila-based distributor and operator of casino gaming machines.

The context of his remarks – in relation to the regional casino industry – is the Chinese government’s ongoing crackdown on high-level corruption and the flow of capital offshore.

In the 11 months to November 30, Macau’s accumulated casino gross gaming revenue (GGR) fell 35.3 percent compared to the same period in 2014. That has been linked by analysts in part to China’s anti-graft drive. Other Asian jurisdictions have also experienced a downturn in business from high roller Chinese gamblers, a number of equities brokerages have reported.

In that climate, new or existing casino properties in the region need to focus on being genuine leisure resorts appealing to mass customers, Mr Pisano suggested.

“In order to be successful the larger properties need to be destination properties to attract some of the 100 million tourists currently travelling from China,” the gaming entrepreneur told GGRAsia.

The most prominent recent example in Macau of the new focus on the mass market is the US$3.2-billion Studio City resort on Cotai, which opened on October 27 with a Ferris wheel, magic shows, and a Batman-themed virtual ride – but not a single VIP gambling table.

New products needed

Mr Pisano said that to have true mass-market pulling power, the regional industry also needs to pay attention not only to non-gaming attractions but also to gaming product categories that go beyond traditional casino table games and slots. VIP baccarat revenue as a percentage of all Macau casino revenue has been steadily falling from the 60 percent-plus seen during the VIP boom years to as little as 53 percent in the three months to September 30. But rather than approaching mass-market players as if they were merely poorer versions of their VIP cousins, the industry needs to consider adding fresh gaming product categories, said Mr Pisano.

“Legal sports book is an underrated product category in Asia,” said Mr Pisano.

“In 2016 I expect to see the growth of retail sports book in Asia both through land based casinos and standalone retail outlets.”

There would also be growth of the use of e-wallets to pay for gaming, and possible growth in the video lottery terminal segment and in licensed online lotteries, suggested the businessman.

In Las Vegas – a destination noted for its appeal to mass-market customers including non-gamblers – sports betting is a staple of casino gaming floor product. No Macau casinos have gaming floor sports books. A firm called Macau Slot Co Ltd currently has a government concession for sports betting in Macau, with the present concession due to expire on June 5, 2016. Macau Slot is part of the business empire built by Stanley Ho Hung Sun, founder of Macau casino operator SJM Holdings Ltd.

Introducing leisure-focused gaming products that are not traditional to Asian casinos might also make good sense in relation to the current political climate. China News Service, a mainland media outlet, reported in August that China’s Ministry of Public Security had started an operation called “Chain Break” – said to be aimed at disrupting foreign casinos’ access to money flows from China and those casinos’ links to individuals that scout for high value gamblers from China.

“I expect in 2016 that we will see new properties emerge in provincial cities in the Philippines and Vietnam that will be true destination resorts offering both recreational and entertainment activities. These properties will be in the vicinity of international airports,” stated Mr Pisano.

Southeast Asia

Tim Shepherd, executive director and president – business development, at Asian regional gaming operator Silver Heritage Ltd, told us that Southeast Asian markets were worth watching in 2016.

“I think it’s possible a major international group will do something big in Laos or Cambodia; and that would be a surprise to most people,” said Mr Shepherd.

“It’s likely more South Pacific islands will join the ‘party’ in the race for Chinese tourists and casinos, but I think they need to think small initially otherwise it will be a battle for them to find people willing to provide funding,” added the Silver Heritage director.

“I also think 2016 could be the year people will finally realise that India is a [source] market that needs properly addressing for gaming – and not by opening an Indian restaurant tucked away next to convention centres,” stated Mr Shepherd.

Hong Kong-based Silver Heritage currently operates gaming venues in Asian markets including Nepal and Vietnam and employs more than 570 people across operations in five countries.

Tony Tong, director and co-founder of Pacific Financial Services Ltd, a Hong Kong-based firm whose services include debt collection and risk management, also thinks Southeast Asia is worth watching in 2016.

“The number of Chinese tourists visiting Southeast Asian countries will continue to grow, and gaming for locals in Vietnam might possibly move forward next year,” Mr Tong told us.

Macau hangover lingers

“Macau junket operators and agents continue to leave Macau and expand operations in other Asian regional markets, for example the Philippines, Vietnam, Cambodia, Laos, [South] Korea… to pursue higher profit margins, higher commission and rebates, higher profit share, and lower taxes,” stated Mr Tong.

Tax on VIP play in the Philippines is the equivalent of 15 percent of the gross. Macau’s direct tax on casino gambling of all types is 35 percent of the gross plus other contributions, bringing the effective tax rate on casino wagering in the city up to 39 percent.

Set against the apparent tax advantages of places such as the Philippines, is the challenge of getting Chinese players to visit any Asian casino in the current political situation. During 2015 there were a number of media reports indicating China’s appetite for cross-border regulatory oversight of its own citizens and their businesses.

The Manila Times newspaper in May 2015 reported that in February that year a Chinese citizen called Bo Wang – wanted in China for allegedly operating offshore an illegal online gambling operation – had his passport cancelled by the Chinese authorities and was detained by the Philippines Bureau of Immigration following a request from the Chinese authorities.

“China will continue with its anti-corruption campaign – in order to fight illegal movement of funds, underground banking and illegal currency exchange – including new measures to restrict UnionPay card purchases and cash withdrawal overseas,” Mr Tong told us. He was referring latterly to stricter regulatory oversight applicable to mainland residents holding China UnionPay Co Ltd cards; that can be used in cross-border payment for goods and services and for cash withdrawals.

In the context of greater official scrutiny by China of its well-heeled citizens when they go gambling, “how quickly the entire Asia Pacific gaming industry can change gears and go after a more mass-market oriented customer is an interesting question,” Grant Govertsen, an analyst at Union Gaming Securities Asia Ltd told GGRAsia.

“It isn’t just Macau that has the VIP problem. Markets like [South] Korea and the Philippines were banking on Chinese VIPs for growth in the coming years,” added Mr Govertsen.

Japan’s appeal

Crackdowns – reported in the mainland China media – on China marketing agent networks said to feed VIP players to casinos in South Korea, were evidence that “Macau’s loss is no one’s gain”, said a note in August from brokerage Sanford C. Bernstein Ltd.

That type of pressure on the Chinese VIP segment in Asia Pacific markets “would lead to a secondary question of how to get mass-market oriented customers to go to markets like the Philippines (and even Macau) when there are more attractive non-gaming options out there like Japan,” noted Mr Govertsen.

As for the long-discussed prospects of casino resorts in Japan and how that might play out in 2016, the Nikkei Asian Review reported on Saturday that the Liberal Democratic Party, Japan’s governing party, would continue pushing a plan to build casino resorts in time for the 2020 Olympics, despite “bureaucratic challenges and lingering opposition threatening to derail the effort”.

Macau stocks

While most institutional investors have steered clear of Macau gaming names amid sustained and universal falls in the prices of those stocks during 2015, there are still many unknowns regarding how China’s anti-graft campaign will play out in the next 12 months, say investment analysts.

“Whether or not there will be a lot or just a little VIP decline in Macau in 2016 is another interesting question,” said Mr Govertsen.

“Consensus would suggest that VIP will continue to suffer in 2016: we just don’t know the magnitude yet. Complicating the picture will be such things as the potential institution of a ban on VIP players smoking in casinos, the potential for more strict junket regulations, question marks on junket liquidity, and, of course, general economic trends in China,” added the analyst.

Mr Tong of Pacific Financial said he thought “more VIP junket operators may fail in Macau,” which he attributed to “industry wide debt collection issues and problems,” including what he describes as the failure of some fund raising schemes and high yield investment projects that might have been expected – in more bullish trading conditions – to have added fresh capital liquidity to the junket system.

“I expect the new DICJ director will initiate more compliance and control measures to regulate junket financing issues, and deposits [for gambling] will be limited or restricted,” said Mr Tong, referring firstly to Paulo Martins Chan, a former assistant public prosecutor-general in Macau, who became head of Macau’s casino regulator the Gaming Inspection and Coordination Bureau – also known by its Portuguese acronym DICJ – on December 1.

Supporting infrastructure

Expected improvements in Macau’s transport links with Hong Kong and mainland China – and new infrastructure domestically including the under-construction light rail system – are among positive factors for Macau recently mentioned by analysts.

Mr Govertsen suggested some caution is required, even on this topic, with a delay recently announced on the original 2016 completion date for the Hong Kong-Zhuhai-Macau Bridge and news that the Taipa section for Macau’s light rail system – the part serving the casino resorts – would not be ready until 2019.

“Will the vaunted infrastructure projects that will eventually support Macau get pushed back even further, or will much progress be made in 2016? For example, is the bridge a 2017 or a 2020 event?” said the Union Gaming analyst.

Additionally, referring to the expected launch – on June 25, 2016 – of Wynn Macau Ltd’s US$4.1-billion new Cotai casino resort, Mr Govertsen said: “Perhaps the most important question in the short-term in Macau will be whether or not Wynn Palace will be interesting enough to drive incremental demand to the market. The two properties that came online in 2015 have not yet demonstrated an ability to grow the market: although they have managed to take some market share from competitors.

“We are quickly approaching the two-year anniversary of the beginning of the bear market for Asian gaming equities,” noted the analyst.

“While a stable GGR and cash flow story will make gaming in Asia more investable again, a demonstrated ability to grow revenue on the heels of new supply would clearly be a shot in the arm with respect to seeing gaming equities turn the corner,” said Mr Govertsen.