Scientific Game

High-End Anxiety

Macau VIP revenue has fallen two quarters in a row, the sector’s worst performance in five years … So where have all the whales gone?

Tuesday, 14 October 2014 11:13
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Macau VIP has been the wonder of the gambling world. Last year alone, the self-governing Chinese territory’s 35 casinos generated US$45 billion, the equivalent in revenue terms of seven Las Vegas Strips, and credit-fueled VIP play drove 66% of it—68% on average since the market opened to competition 10 years ago, a decade in which total gaming revenue has grown at an amazing annual rate of 26%. But the earth is shifting under the city’s vaunted high end and the junkets that recruit and bankroll it. Through September, growth in the sector has come up short against last year for five consecutive months, and it’s now expected that 2014 will end with VIP revenue in negative territory year on year. This has happened only once in the post-monopoly era.

Macau and Las Vegas: on the map they’re an ocean apart, yet on that hyper-competitive plane where China’s prized high-rollers travel and spend, they’re more like next-door neighbors. This is not necessarily working out in Macau’s favor.

In the second quarter, VIP in the largest casino market in the world was down year on year for the first time since the autumn of 2012. In the third quarter it would fall even more. The reasons have been well-documented because the six casino concessionaires are all publicly traded. Basically, they boil down to the fact that for wealthy mainlanders lavish spending at private baccarat tables is not as easy financially or logistically as it used to be, and it is not at all expedient politically, which likely is the weightier consideration of the two. Macau’s high-end retail is feeling the pinch as well. Jewelry and watch sales are in a slump. Popular items that serve also to help gamblers evade China’s currency controls their sales in the first quarter were the slowest in a year, according to figures compiled by the Macau Statistics and Census Service. They went completely south in the second, falling 21.9% sequentially and 21.8% compared with Q2 2013. It was the first quarterly decrease in more than four years. Sales of leather goods fell 12% from the first quarter to the second, and the growth in Q2 was the softest since 2011. In the casino’s elite VIP salons it played out in a 6% decline in revenue in the April-June period on a 3% decline in sales of so-called “dead chips,” the currency in the rooms, rolling chip volume, as it’s known, the key indicator of the health of the sector. The volume decrease was even worse viewed sequentially, down 14%, and it drove revenue down 16%. It was the sector’s worst performance since the 2008-2009 global financial crisis. 

While this was unfolding, the Las Vegas Strip was enjoying one of its best quarters for baccarat ever: US$395.4 million in win, almost double the take of the year-ago period, boosted by a run of good luck (hold was 400 basis points higher), and a 34% surge in wagers.

   CHINESE M2 Growth

This was captured by all of 295 tables, which is interesting, because at 1.25%, the casino’s advantage on baccarat, it worked out roughly to $107 million worth of bets per table, high-end action by any standard.

What’s more interesting is that most of those tables (284) were run by the Strip’s 18 largest casinos by revenue, a group consisting of four operating companies—MGM Resorts International, Las Vegas Sands, Wynn Resorts and Caesars Entertainment—three of which, of course, are ensconced in Macau. This is no coincidence. Most of the Strip’s high-end play is international, and the consensus is that most of it originates in Asia. Baccarat, the game of choice of China’s VIPs, is the biggest game on the Strip five years running, accounting now for more than 45% of table drop and more than half the win. Wynn Resorts, for example, noted midway through last year that Asians accounted for 52% of table revenue at its two Strip resorts. And it’s more profitable revenue than it is in Macau by virtue of Nevada’s low tax rate (6.75% versus Macau’s effective 40%) and the absence of junket commissions—conceptually about twice as profitable dollar for dollar on a pre-tax basis, according to research by investment bank CLSA Asia-Pacific Markets—another incentive to drive the business to Las Vegas, especially for Wynn and MGM, which derive a greater share of their corporate profits on the Strip than LVS does.

It’s impossible to assess precisely how this is impacting Macau. The Strip’s baccarat win in the second quarter implies that drop was around $31 billion. Not all of this could have comevat Macau’s expense, of course. But if we assume 50% was play out of China—which is probably conservative, approximately in line, however, with Wynn’s information noted above—that’s $15.5 billion that wasn’t gambled in Macau, or anywhere else for that matter. There are, after all, only so many whales in the sea when it comes to committing to the Hong Kong dollar equivalent of the 5 million or 10 million yuan buy-in needed to qualify for a flutter at a private table in Macau. (If Calvin Ayre’s Rafi Farber has it right, and he’s an insightful observer of the Asian gaming scene, 22% of Melco Crown’s first-half revenue was derived from all of five players.)


Macau has seen VIP slowdowns before. Revenue even fell once year on year, in 2005, when it dipped 3%. Growth plummeted from 32% in 2008 to 8% in 2009 when the financial crisis hit. In 2012, it grew only 7.5% (it was up 44.6% the year before) at a time when China’s leadership was changing hands, a once-in-a-decade event, and the fallout from the Bo Xilai scandal was still fresh.

In each of these cases the broad assumption was that if China’s high rollers weren’t coming to Macau they weren’t gambling. This time might be different.

The VIPs and their bankers, the junkets, are fixed in the sights of a central government wrestling with endemic corruption in high places and a shaky financial system that’s feeling the heat from falling property prices—they’ve dropped more than 10% this year; they fell in August in 68 of the country’s 79 most-watched cities, the highest number on record—and an expected softening of GDP this year and next. The government isn’t resorting to the printing press either, preferring to keep a rein on money supply to allow the economy to adjust moderately downward; and so credit is tightening, which directly impacts access to capital for the junkets at a time when players are feeling less wealthy and moving slower to repay their markers. The plague of capital flight, estimates of which have ranged in excess of US$200 billion a year, has spilled onto the junkets as well. It’s a lot of money, $45 billion, not counting all the off-the-books side-betting going on, which some observers believe to be at least equal to that, and the junkets and their agents and associates and investors are under greater scrutiny than ever, according to some reports. They’re being squeezed at the other end too. Casinos in some instances are exploiting the situation to reduce their influence, ratcheting up terms and demanding greater levels of disclosure while simultaneously moving more tables out of VIP to cater to their higher margin cash players, a far more profitable business for them in an operating environment where the supply of new tables is capped by law at 3% a year.

                                                          CHINA - Property Sales Growth

The impacts are being felt in the mass market, where growth has slowed by half since the first quarter. Indications are that higher-limit cash players are becoming more cautious. The transit visa system has been tightened, resulting in fewer allowable trips from the mainland, and the government is cracking down on use of its popular state owned UnionPay debit card system to withdraw cash for gambling in excess of the statutory limit of 20,000 yuan (US$3,200) a day.

Gaming revenue growth has fallen eight of the last nine months and went negative year on year in June, and so it’s stayed every month since, declining by 11.7% in September, the worst performance in five years. The downward pressure is coming mostly from VIP, which went revenue-negative in May. It’s down 19% year on year in the third quarter and 4% year to date. Analysts don’t expect a turnaround before mid-2015, when the first resorts of Cotai’s much-anticipated “second wave” come on line, and some are doubtful even of that.

Morgan Stanley estimates that more than 30 junkets have folded, individuals and companies, since the end of 2012, victims of the liquidity crunch and competition from larger, better-capitalized rivals. Dore Holdings, one of the largest, threw in the towel this year. SunCity, the largest, is diversifying into non-gaming investments. Others are pursuing casino projects abroad. Others are working existing markets from Australia to the Philippines to Indochina to take advantage of more relaxed environments where tax rates are lower and better deals can be had on comps and commission rates. They are, of course, taking their players with them.

Nor is it unreasonable to suppose that more than a few of their customers are tiring of Macau and would prefer to frequent it less often in favor of more exotic locales they may see as more gratifying to their wealth and status, and safer in terms of the possible ramifications back home.

This would make sense in the larger context of a China that is becoming more affluent and more global in its outlook and aspirations. The analysts at CLSA said in an extensive report released earlier this year, “We incorporate shifting travel patterns into our Chinese outbound-tourist estimate and forecast stronger growth in further-out locations as travelers look for a more desirable travel experience.” Hong Kong financier Tony Fung’s A$8 billion plans for a mixeduse resort complex in north Queensland, Aquis at the Great Barrier Reef, are designed precisely with this in mind. He is confident it will be “an easy sell”.

Hong Kong financier Tony Fung’s A$8 billion plans for a mixed use resort complex in north Queensland, Aquis at the Great Barrier Reef, are designed precisely with this in mind. He is confident it will be “an easy sell”.

“You see, if you go to Macau your colleagues think you are a gambler. If you go to Singapore they think you are a gambler. But if you say you are going to Cairns and the Great Barrier Reef, then you are still a family man.”

                                             Asian VIP Markets 1H14 Growth – Macau is Lagging


Macau is the only place in China where casinos are legal. It’s not the only place in Asia. There is no reason why the supply-side logic driving the enthusiasm behind the new Cotai openings shouldn’t apply to similarly scaled investments elsewhere. 

As Morgan Stanley’s Praveen Choudhary, Alex Poon and Thomas Allen noted in an October client report, “Other markets are adding capacity and marketing initiatives, including Cambodia, Philippines [etc.], and “VIP growth in those countries has started to outpace Macau in recent quarters.”

Phnom Penh’s NagaWorld monopoly just came off a 20% firsthalf increase in rolling chip volume and is steadily adding junket partners. South Korea’s Paradise Group reports that table drop from Chinese VIPs was up almost 25% in the second quarter, accounting for a hefty 66% of total drop at the five casinos owned by the leading operator in the country’s foreigners-only market. Gaming revenue surged 56% in the second quarter at Manila’s new Solaire Resort & Casino on strong growth in VIP turnover, most of it overseas play. Junkets accounted for a reported 80% of it. The city will become an even more formidable competitor for China’s high end with the opening later this year of Melco Crown’s City of Dreams Manila.

Macau still ranks high among Chinese travel preferences, but CLSA expects that as destinations go it will “underperform” other locations in the years ahead, a trend which they’ve observed going back to 2005. They say the same goes for Hong Kong.

But even now when the country’s high net worth individuals think of destinations Macau ranks rather low on the list. It trailed Hong Kong, Sanya, Yunnan, Tibet and Xinjiang, according to the 2013 edition of “The Chinese Luxury Traveler,” published by the Shanghaibased Hurun Report, the bible of China’s new wealth class.

Wolfgang Georg Arlt, director of the China Outbound Travel Research Institute, sees “more and more Chinese spreading out all over the planet, discovering destinations and travel forms more diverse than ever”. This includes “more smaller destinations, for leisure trips, for investment, and also for gambling”. He expects the share of destinations outside their current Top 10 will grow from 19% to 24% in the year ahead.

It’s not only gaming operators chasing this money around the globe. Outbound property investment from mainland China has soared from less than US$70 million in 2008 to $16 billion last year, according to real estate services company Colliers International. Of the top 10 listed global developers by revenue, seven of them are now mainland Chinese.

Part of this is defensive, a response to the cooling of the domestic property market. But there is more to it than that. “[The Chinese are] much more active than before as they have seen the growth of Chinese travelers traveling aboard, and they think they can [cater to] this business,” said William Dong, CEO of Best Western (China), speaking recently to Hotel News Now, an arm of hospitality analytics giant STR.

Gaming industry observers are familiar with Genting Group’s plans for a $4 billion China-themed megaresort on the Las Vegas Strip and major moves such as China’s Export-Import Bank’s $2.4 billion financing of the 1,000-room Baha Mar Casino & Hotel in the Bahamas. China State Construction and Engineering, the country’s largest contractor, is investing $150 million in the project. Opening is scheduled for the spring.

Hong Kong-based property developer Landing International is partnering with Genting Singapore on a mixed-use resort on the South Korean island of Jeju, home to eight casinos already and a popular spot for Chinese tourists, who enjoy 90 days’ visa-free access there. Macrolink Group, a Shenzhen-listed investment holding company, has teamed up with South Korea’s Black Stone Resort on another Jeju destination that may include a casino.

The number of Chinese tourists visiting Jeju has surged 67% in the last five years to reach 1.8 million last year. Nationwide they totaled 4.3 million, a 52% increase over 2012. Through the first half of this year, they accounted for 40% of all foreign tourists. In the country’s 16 foreigners-only casinos they’ve surpassed the Japanese as the principal revenue engine, and two large-scale gaming resorts are under development near the main international airport in Incheon to take those numbers higher—one by Paradise in partnership with Japanese pachinko giant Sega Sammy, the second by an Asian consortium led by Las Vegas-based Caesars Entertainment.

Lawrence Ho’s Melco International Development has bought into casino development ventures near Vladivostok in Russia’s Far East, targeting the north China market, and in a mixed-use resort complex envisioned for Barcelona. Europe, an “aspirational” destination among Chinese, is seeing record-high Chinese investment in real estate, driven in no small part by a desire to secure prized “Golden Visas” granting EU residency. Experts say Spain is seen as a particularly attractive country to invest in in this way. 

Australia has long been popular among Chinese with the wherewithal as a place to live and educate one’s children, and their history as investors there runs long and deep. Federal government data show Chinese buyers now surpass Americans as the biggest foreign investors in property. They are also the continent’s fastestgrowing tourist market and its biggest spenders. Their allure has the government of Queensland pursuing the largest casino expansion in Australian history. The three licenses the state is adding to the four already in place have attracted proposals in the billions of dollars, all backed by deep-pocketed Chinese interests.

Mr Fung, a veteran Queensland investor and property owner, has preliminary government approval for Aquis and has bought the Reef Casino Hotel in nearby Cairns (a deal that includes Canberra’s casino in the Australian Capital Territory) and a second non-gaming hotel in Cairns to support the project.

A consortium formed by Australia-listed ASF Group, Baha Marbacker China State Construction and CCCC Guangzhou Dredging is similarly approved for a mixed-use resort in Gold Coast called Broadwater Marine whose plans include a cruise ship terminal and luxury marina.

The third license envisions a $1 billion-plus resort casino in Brisbane, the state capital. Greenland Holding Group, a Shanghaibased developer of global stature with $1.5 billion of investments under way in Sydney and Melbourne, is partnering with James Packer’s Crown Resorts on one of the bids. Crown’s rival Echo Entertainment, Brisbane’s incumbent operator, has joined forces with Chow Tai Fook Enterprises and Far East Consortium, both headquartered in Hong Kong, on a competing bid of similar size and scope. Chow Tai Fook’s extensive holdings in property, hospitality and consumer goods include the largest jewelry retailer in the world. Far East, which owns dozens of hotels around the world, is building a $1 billion residential and retail complex in Melbourne and has been a notable player in Australia for years.

As Mr Fung puts it, “Everyone is looking at how to take a piece of the Macau pie.”


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