GGRAsia – Hard for Macau to adopt Vegas-style diversity: Fitch

Hard for Macau to adopt Vegas-style diversity: Fitch

Aug 25, 2015 Newsdesk Latest News, Macau, Top of the deck

Macau needs to be realistic about the volume and type of non-gaming revenues its casino resorts can produce, even as the local government seeks to move the city’s tourism industry away from a particular dependence on high stakes gambling, says Fitch Ratings Inc.

Factors include structural differences in the Macau tourism market compared to Las Vegas, said a commentary from Alex Bumazhny, a director at the ratings firm. It was published on Monday by Fitch Ratings’ website thewhyforum.com.

In 2014, fewer than 10 percent of Macau casino resorts’ gross revenues came from non-gaming activities, estimated Mr Bumazhny’s commentary. The Las Vegas Strip – which Fitch described as the “poster child” of gaming market diversification – made 63 percent of its revenues from non-gaming in that period, said the ratings agency.

“When setting benchmarks and goals Macau’s officials need to be cognizant of Macau’s super sized gaming revenues, in part inflated by the VIP commissions, and the high 39 percent gaming tax rate that will make catching up to the Las Vegas Strip’s non-gaming mix difficult if not impossible,” stated Mr Bumazhny.

The “biggest impediment to diversification for Macau may be what casino operators and investors consider its main strength – its proximity to mainland China,” added the Fitch director.

He said that even amid the current slowdown, each Macau table game generates more than US$12,000 per day, more than double the most productive Las Vegas Strip casinos. “This strong gambling demand tends to shrink the non-gaming aspects as percentage of the whole pie and price out more casual gamblers and non-gamblers” from the Macau market, said the Fitch commentary.

Macau’s high effective tax rate of 39 percent on gross gaming revenue makes it “less enticing” for the city’s casino operators to market services aggressively to more casual gamblers – the “base” mass – noted Fitch.

“Nevada’s gaming tax rate is 7 percent, which means that a Las Vegas Strip operator, all else being equal, can reinvest additional 32 percent of the player’s theoretical win into the player in form of comps [complimentary allowances] relative to Macau without sacrificing margin,” stated Mr Bumazhny.

“A customer that may look barely profitable in Macau is a lot more attractive to a Las Vegas casino. Las Vegas Strip’s 63 percent non-gaming mix includes 10 percent of free giveaways, or about US$1.5-billion worth of rooms, food and beverage,” noted the ratings house.

Mr Bumazhny did acknowledge however that the equivalent of billions of U.S. dollars in new infrastructure related to Macau – including the Hong Kong–Zhuhai–Macau Bridge, and nearly 12,000 extra hotel rooms on Cotai – is likely to benefit the development of the city’s mass-market.

Studio City, a new casino resort majority-owned by Melco Crown Entertainment Ltd and that is due to open on October 27, will add 1,600 hotel rooms and a wide range of non-gaming facilities, including a Ferris wheel and a Batman-themed virtual reality ride.

Mass-market gaming and non-gaming business is likely to be a more sustainable pursuit for Macau than chasing high stakes gamblers, said a report on August 20 from brokerage Sanford C. Bernstein Co LLC.

“Macau gross gaming revenue in 2014 (US$44 billion) was roughly 7 times that of Las Vegas. And 60 percent of Macau revenue came from the VIP segment. We estimate that this segment represents just about 100,000 to 120,000 players who – on average – lost US$210,000 in Macau in 2014,” stated the report from senior Sanford Bernstein analyst Vitaly Umansky and colleagues including the brokerage’s strategist Michael Parker.