Non-gaming revenue for Macau casino resorts is “simply not large enough” to offset declines in gaming spend in the city, says a report from Union Gaming Research LLC.
The document, carrying Wednesday’s date, was compiled after the firm’s analysts met senior casino industry executives, including the chief financial officers of several Macau gaming operators.
Market wide, Macau’s casino gross gaming revenue (GGR) for November fell by 32.3 percent from the prior-year period, the 18th straight month of GGR retreat measured year-on-year. It was the lowest monthly GGR tally since September 2010, according to official data.
The total spending – excluding gaming expenses – of visitors to Macau in the third quarter fell 19.5 percent year-on-year according to data released on November 19 by the city’s Statistics and Census Service.
In 2014, fewer than 10 percent of Macau casino resorts’ gross revenues came from non-gaming activities, estimated Fitch Ratings Inc in a report issued in August.
Nonetheless, the Macau government has spelled out to the casino industry that it wants to see an increase in non-gaming elements such as shopping and live entertainment at the new resorts that are being opened on Cotai between now and the end of 2017. The government has said in particular that it will link gaming table allocation for such projects to their non-gaming offer.
But analysts say that puts pressure on a business model in Macau that requires gaming operators to spend as many billions of U.S. dollars on new resorts as they were required to before the advent of what China’s government has referred to as the “new normal”. That has included a moderation of the country’s economic growth, greater scrutiny of money being sent offshore, including cross-border transfer for gambling, and a central government-led campaign in pursuit of corrupt officials and business people.
“Non-gaming is simply not large enough to offset declines in gaming revenue,” said Union Gaming analysts Christopher Jones and John DeCree in their Wednesday report and referring to the Macau tourism market.
“While the non-gaming segment is growing as a percentage of overall revenues, the mix-shift is being fostered by a reduction in gaming win rather than a more significant acceleration in non-gaming revenue,” they added.
The most recent Macau gaming resort to open – the US$3.2-billion Studio City, 60-percent owned by Melco Crown Entertainment Ltd and launched on October 27 – has a wide range of non-gaming facilities.
Union Gaming stated: “In five to 10 years, non-gaming might be the primary driver of EBITDA [earnings before interest, taxation, depreciation and amortisation] in Macau given the market’s significant investment in this area; however, it is unlikely that non-gaming will significantly drive Macau earnings in the next 24 to 36 months.”
Bet velocity
The analysts noted that if average bet size in the Macau market declines – as the highest value players stay away or reduce the frequency of their visits as has been widely reported – then either the frequency of betting among remaining, lower value, gamblers needs to rise or the number of such bettors needs to rise dramatically simply in order for the market to maintain profitability.
The Union Gaming team said that with a conservatively assumed win percentage on baccarat of 1.25 percent for the house, “an 80 percent reduction in average bet size increased the number of bets required to maintain profitability by 400 percent”.
The report added that “given the economic challenges facing China today” there was “little evidence to support [the idea] that Chinese customers are going to start spending more per visit”.
The institution’s team also noted VIP gambling in Macau would “likely get worse before it gets better”. They stated: “Junket liquidity and the overall number of junket operations in the market continue to contract and consolidate.”
About 40 percent of the VIP gaming promoters – commonly known as junkets – that had been licensed by the Macau government prior to the downturn in high roller gambling, are no longer active in the local casino market, said Robert McBain, chief financial officer of Macau casino operator SJM Holdings Ltd, during a conference panel at the Macao Gaming Show on November 18.
One antidote to the market’s current woes says Union Gaming, is to increase market access for mass-market visitors.
The monthly tally of visitors to the city has declined year-on-year in seven of the first 10 months of 2015, according to Macau government data.
Nonetheless the number of hotel rooms in Macau is set almost to double over the next few years, according to official data released in August. The decline in the number of VIP gamblers is also said to have freed existing hotel rooms that would otherwise be held back for such high value players.
“With more room supply, it is logical to believe that Macau can expand visitation,” said Mr Jones and Mr DeCree.
“However, government actions in Macau do not suggest that they will allow unlimited growth in visitation. Assuming that they eventually come to their senses, we believe it would be after Macau sees infrastructure improvements that steer Chinese tourists away from the peninsula,” added the Union Gaming team.
