Macau’s third party casinos are likely to face increasing difficulties as the city’s gaming market continues to slump, says Union Gaming Securities Asia Ltd.
“In our view, it will become increasingly more difficult for most of the third-party casinos to compete in the years ahead given their lack of amenities (and budgets) relative to the existing and next wave of Big 6 projects,” analyst Grant Govertsen wrote in a report on Thursday.
‘Big 6 projects’ is a reference to casino projects – mostly resort-style with capital expenditures measured in billions of U.S. dollars – that are directly developed and then managed by any of the city’s six official casino concessionaires: Galaxy Entertainment Group Ltd, Melco Crown Entertainment Ltd, MGM China Holdings Ltd, Sands China Ltd, SJM Holdings Ltd and Wynn Macau Ltd. Third party managed casinos – also known as satellite casinos – have to piggyback on the licence of one of the city’s official casino concessionaires.
There are currently 19 third-party casinos operating in the territory – the majority of them on Macau peninsula. The city officially has a total of 35 casinos. A total of 15 third-party casinos are operated under SJM Holdings’ licence; three under Galaxy Entertainment; and one under Melco Crown.
“Nearly all of these properties are, to put it mildly, much smaller and much less physically attractive than the properties already developed and being developed by concessionaires,” Mr Govertsen wrote.
He added: “As Cotai continues to develop we would look for the Big 6 operators to pick off more market share from the third-party casinos.”
Union Gaming forecast all Macau’s six casino concessionaires could steal market share from the third-party casinos. But its report stated Wynn Macau and MGM China, both with flagship properties on the Macao peninsula, were “the most natural share takers” because of their potential to free up hotel room inventory on the peninsula once their new properties in Cotai open next year.
Most third party casino operators have been suffering from Macau’s gaming slump. Market wide gross gaming revenue (GGR) for November fell by 32.3 percent year-on-year to approximately MOP16.43 billion (US$2.06 billion), according to data from the city’s regulator. It was the 18th straight month of GGR retreat measured year-on-year and the lowest monthly GGR tally since September 2010.
Emperor Entertainment Hotel Ltd, owner and operator of third party casino property Grand Emperor Hotel, reported on Monday a 57.7 percent year-on-year decrease in profit for the six months ended September 30.
Last month, Kingston Financial Group Ltd reported that gaming revenue from two Macau third party casinos it controls – Casa Real on Macau peninsula and Grandview on Taipa – fell by 38 percent year-on-year in the six months to September 30.
“Much like the closure of a large number of VIP junkets, or the absorption of them into larger junkets, we would not be surprised if some number of [the] third-party casinos don’t survive the downturn and next wave of expansion,” Mr Govertsen wrote.
He added that could create opportunities for mergers and acquisitions in the segment. But the Union Gaming analyst cautioned about the “complex” ownership structures of many third-party casinos.
“That doesn’t mean that there are no opportunities to be had,” Mr Govertsen stated. “It is important to remember that even if cash flows dwindle to almost nothing there is still a lot of value associated with these third-party casinos, namely the underlying land value of very scarce gaming-entitled and hotel-entitled land.”
Union Gaming also noted that there were a few third-party casinos that stood out as well equipped to survive under current market conditions and even to thrive: Those included: Macau Legend Development Ltd’s Macau Fisherman’s Wharf redevelopment project; L’ Arc; and the upcoming Louis XIII.
Louis XIII is scheduled to open in the summer of next year. It will be Macau’s 20th third-party casino. The project’s promoter, Hong Kong-listed Louis XIII Holdings Ltd, has not publicly named a gaming concessionaire partner so far.
Segment worth US$4 bln in GGR
Union Gaming’s report noted that third-party casinos are still attractive to many Macau gamblers.
“We estimate that these casinos are currently run-rating nearly HKD31 billion (US$4 billion) in GGR [per year], which, if applying typical concessionaire margins, has the potential to generate HKD7.7 billion in EBITDA [earnings before interest, taxation, depreciation and amortisation],” Mr Govertsen wrote.
Union Gaming’s report highlighted several reasons why third-party casinos are still popular. They include location, as many such properties are within easy walking distance of each other on the Macau peninsula and within walking distance of the existing peninsular flagship casinos of gaming concessionaires.
The Gongbei Border Gate, also on the peninsula, is the largest single point of entry – judged by traveller volume – between Macau and mainland China. A total of 12.6 million visitors, or 49.3 percent of the total number of visitors to Macau in the first 10 months of 2015, used the Border Gate checkpoint to enter the city.
Other reasons for the popularity of third-party casinos, according to Union Gaming, include their long history in operation, personalised marketing strategies and the fact that they are often perceived by players as less intimidating than large casino resorts.
Nonetheless, Union Gaming noted that third-party casinos “are clearly losing [market] share, but perhaps not as dramatically as one would have thought in the context of the availability of higher-quality assets”.
It estimated that overall GGR share for this type of casino in Macau has shrunk from 16.5 percent in 2012 to 14.7 percent in the first six months of 2015.
“Over the coming quarters and years, we would expect this share to shrink even further,” Mr Govertsen wrote.
Market share losses for third-party properties between 2012 and the first half of 2015 took place both in the VIP and mass table segments. according to estimates by Union Gaming. In the slot machine segment, the share of third-party casinos increased slightly during the period.
Mr Govertsen concluded: “The bottom line, in our view, is that the next wave of development, in addition to what will become freed-up space at legacy flagship casinos on the Macau peninsula, is bad news for the third-party operators who will continually find it harder to attract and retain customers.”
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”We expect Goa to quickly become a US$1 billion market as it transitions to land-based casinos (from US$150 million today), which is still just a fraction of India’s total GGR potential of US$10 billion to US$17 billion”
Analyst at Union Gaming Securities Asia