The days in Macau of ‘build it and they will spend’ might be over. The game now for gaming operators could be more about choosing carefully what casino and tourism facilities to build or to refresh, in order to tempt new consumers. That is one of many ideas explored in a new report from Morgan Stanley Research Asia Pacific.
Much of the recent commentary on Macau has been about the political factors in mainland China that have kept some high roller gamblers away, and about whether the resulting displacement of such Chinese players to other regional markets is a mid- to long-term phenomenon. There are many moving parts in projections of future performance for Macau and for its neighbouring casino jurisdictions.
But a maxim in business is to spread some risk. Chinese VIPs accounted for about 61 percent of Macau’s gross gaming revenue (GGR) in 2014; a high proportion but actually a decline from previous years.
Any industry that chooses to depend for much of its revenue – and potentially its capital returns – on a numerically modest portion of customers faces significant risk to the rate of those returns if the pipeline delivering the customers is disrupted in some way. And the pipeline of VIPs to Macau is currently either leaking or blocked, according to analysts.
“The global VIP market has contracted by 8 percent in 2014, largely due to the corruption crackdown in China and junket liquidity crunch that drove 12 percent decline in the VIP business in Macau in 2014,” states the Morgan Stanley Global Insight report published on March 25. It indicates that while some rival destinations might be gaining in the short term, the global casino industry is still losing out from China’s crackdown.
Another factor in trying to understand the future direction of the Macau market, is consumers’ thirst for novelty, whether via price offers or facilities. That applies – say some industry researchers – whether they are cossetted VIPs or mass-market punters. In that sense, the increased official scrutiny in Macau might have given some players and some junkets just the prod they needed, in order to explore other opportunities.
Tall tax, voting feet
Fitch Ratings Inc said in a note on March 24 that lower gaming tax rates in Australian states and across jurisdictions in Southeast Asia allowed casinos there to pay higher VIP junket commissions relative to Macau, which it said was “burdened” by its 39 percent effective gaming tax rate. The Macau government in January said it might reconsider the tax rate when it holds what it describes as a mid-term review of the industry later this year.
“VIP volume increased 74 percent in the second half of 2014 at Echo’s and Crown’s properties in Australia,” said the ratings house, referring to Echo Entertainment Group Ltd and market rival Crown Resorts Ltd. “NagaWorld in Cambodia grew its VIP volume in the second half of 2014 by 47 percent. Much of the growth came from China,” added Fitch, referring to the resort run by Hong Kong-listed NagaCorp Ltd in Cambodia’s capital Phnom Penh.
Nonetheless Carlos Siu Lam, associate professor at the Gaming Teaching and Research Centre at Macao Polytechnic Institute, recently warned that any casino operator that competes chiefly on price – such as commission rates for VIP junkets, rewards to players or table minimum bets or maximum payouts – is at risk of losing business in the long term. There must be something to appeal to the upcoming generation of consumers, and something to make the current core market stick around, he said.
“Especially for the younger generation they want to try something new, they want to have a full experience of entertainment – and gambling,” he stated. He has also done academic research that indicates that among Chinese players, novelty – in terms of new resorts and facilities – does drive some new demand.
“We think diversification into non-gaming amenities could allow a gaming destination to grow further and remove the concerns of saturation through broadening of customer segments,” said the report from a nine-strong global gaming team at Morgan Stanley Research led by managing director Praveen Choudhary.
“Non-gaming revenue as percentage of gross revenue is above 50 percent in Las Vegas while it is less than 10 percent in Macau and thus we expect Macau to see growth in that segment and drive visitation up in the foreseeable future,” added the bank.
That is certainly the hope of the Macau government, which has said it will link table allocation for the new Cotai resorts – and indeed any decision on whether to allow the six existing Macau operators to remain in the market when their current rights expire in 2020 and 2022 – to their commitment and practice on market diversification.
Low penetration rate
The good news for Macau in terms of the staying power of its appeal is that it is not as mature a market as Las Vegas in terms of penetration of its domestic market – when penetration is measured as a percentage of the addressable population that has already visited. In the Macau context, the domestic market is defined as mainland China.
“In Macau, despite a massive influx of Chinese visitors that tripled from 7 million in 2005 to 21.3 million in 2014, the visitor-to-urban-China-population ratio is only 2.8 percent in 2014, much lower than [the] 12.9 percent in Las Vegas,” said Morgan Stanley, referring in the latter case to total visitors as a proportion of the “local population”. In the Las Vegas context, “local” is usually a reference to people living within a defined number of hours – in travelling time – of the Nevada city.
Morgan Stanley used compiled data including from public sources such as Macau’s Gaming Inspection and Coordination Bureau and Las Vegas Convention and Visitors Authority (LVCVA) as well as proprietary research.
While it’s not clear that the data presented by Morgan Stanley is strictly an apples with apples comparison on market penetration rates, LVCVA data for 2013 reviewed by GGRAsia do confirm that 52 percent of visitors to Las Vegas that year were from the western United States, and only 20 percent of all visitors were foreigners.
And other data compiled by Morgan Stanley indicates there is a pressing need for Macau to tap fresh markets outside its neighbouring province of Guangdong.
In 2014, 42 percent of mainland visitors to Macau – a total of just over 9 million people – hailed from Guangdong, said Macau Government Tourist Office. Mainland visitors accounted for 67 percent of all Macau visitors that year.
Morgan Stanley Research indicates that when the number of Guangdong visitors to Macau in 2014 is measured as a percentage of the addressable (i.e., urban) Guangdong population, Macau’s market penetration rate in Guangdong is 12.2 percent – much closer to that of the much more mature Las Vegas market relative to its “local population” as defined by Morgan Stanley.
The Las Vegas answer to customer boredom is to blow up old casinos and start again. It is referred to in the business as “implosion”, for the way professional demolition contractors make a worn out gaming property – such as the Clarion Hotel and Casino – collapse upon itself. That venue bit the desert dust on February 10. An alternative for old properties – renovation – rarely seems to attract the kind of customer buzz in Las Vegas as a new launch.
While no one is seriously proposing demolishing Macau properties that are only at most a decade old, they have mostly gone through some degree of remodelling recently in order to refresh their appeal.
Union Gaming Research Macau Ltd said in a note on February 10 that it expected Wynn Macau Ltd to take market share from its competitors in VIP and the mass market, after reopening a refurbished west wing of its Macau peninsula property that week. Daiwa Securities Group Inc said in a note on March 23 that it estimated Wynn Macau’s market share of GGR had improved by 2.6 percentage points to 11 percent as of March 22. It gave no commentary in the note as to the possible reasons.
Revenue is the measure most talked about in media reports about the industry, but producing more top line growth might not help if the cost of your sales rises too much in the mid- to long-term, rather than being just a function of launching new space and ramping up marketing.
“In Macau, casino operators are giving out more promotions to premium mass customers. Promotional allowance as a percentage of gross gaming revenue has continued to rise, and reached as high as 7 percent for Sands China in the fourth quarter of 2014,” wrote Morgan Stanley in its latest report, adding “We think this is the first sign of overcapacity.”
Cost of sales isn’t only an issue in Macau. Morgan Stanley says that in the Philippines, a price war between operators escalated when Bloomberry Resorts Corp’s Solaire Resort and Casino opened in March 2013 and took on the private sector incumbent in the Manila market, Resorts World Manila, operated by Travellers International Hotel Group Inc.
Travellers International is a venture between Philippine-based Alliance Global Group Inc and Genting Hong Kong Ltd. The official opening of the Melco Crown Entertainment Ltd-operated City of Dreams Manila on February 2 is likely to add to the competitive pressure in Manila.
“Promotion allowance as a percentage of GGR reached as high as 30 percent in the fourth quarter of 2013 for Bloomberry,” said Morgan Stanley in its March 25 report. “Travellers also raised promotions to maintain market share, to 10 percent of GGR,” added the bank.
One thing seems clear, according to analysts: Macau operators will also have to work harder for their money and possibly via slimmer mass-market margins in the next months and years.
“History suggests that supply drives demand unless the market becomes saturated or a global/exogenous crisis stops the growth,” states Morgan Stanley, but warns “…incremental visitors have smaller pockets. Mass revenue per Chinese visitor [in Macau] is trending lower in the last 12 months.”
Looking ahead, Morgan Stanley expects the Philippines gaming market to be “the fastest growing sector in the world”, up 39 percent in 2015, while Macau will see the biggest GGR decline this year, down by 25 percent.
Fitch Ratings, in its latest report, revised downward its Macau gaming revenues growth forecast for 2015. The ratings agency is now expecting a drop of 22 percent for full-year, versus a previous forecast of a 4-percent decline.
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Alex Poon and Praveen Choudhary
Analysts at Morgan Stanley