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Strength in numbers

Friday, 29 December 2017 02:54
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Macau’s VIP segment has been historically volatile, but has surprised with the sheer strength of its resurgence in 2017. What can we expect from VIP in 2018?

By Ben Blaschke

 

If the jury was out on the sustainability of Macau VIP’s resurgence for much of 2017, it’s not anymore. Having copped the worst of the battering from the city’s two-year decline in gross gaming revenue – which saw VIP GGR fall a massive 39.9% year-on-year in 2015 alone – the segment staged a stunning recovery in 2017 thanks to higher liquidity and better conditions in China.

The recovery began in 4Q16 with a 12.7% year-on-year increase in revenue generated through VIP baccarat, then quickly soared upwards with VIP revenue growing 16.8% to MOP$35.5 billion in 1Q17, 34.8% to MOP$35.9 billion in 2Q17 and 28.1% to MOP$36.7 billion in 3Q17.

That’s despite analysts warning early in the year that the VIP segment’s first full quarter of growth in almost three years in 4Q16 couldn’t be relied upon to repeat through the rest of 2017.

“The strength seen in 4Q16 was not primarily driven by VIP. It was driven by mass,” said Union Gaming’s Head of Equity Research, Grant Govertsen, in January.

“This is very important in the context of what we see as a sustainable mass market led recovery. While we are very happy to finally see VIP turn positive we remain cautious on the outlook for this segment, which is driven by increasing concerns on Beijing’s stance on capital flight.”

Govertsen has argued that a recent reclassification of gaming tables in Macau has skewed government data towards VIP, so while VIP in 4Q16 officially grew 12.7% and mass market 8%, those figures were, he said, essentially “backwards.”

He wasn’t alone in exercising caution over the segment either, with analysts from brokerage Sanford C Bernstein stating in February that they were “becoming more concerned about China government actions to stem capital outflows.”

“If such actions target Macau, the headwinds could be material,” they added.

Instead, Macau VIP surprised just about everyone in 2017 by not only maintaining positive growth but in fact surging as the year progressed – a fact that completely changes the outlook for the VIP segment in 2018.

Despite earlier concerns over VIP due to its renowned volatility, Govertsen believes growth through 2018 is likely to come in at around 20% growth even taking into account a likely slowdown towards the back end of the year.

“We would expect to see VIP growth maintain around the 30%plus level for 4Q17 and into 1H18,” he told Inside Asian Gaming.

“As comps get tougher in 2H18 we look for the year-on-year growth rate in VIP GGR to moderate … ultimately we expect the fullyear to see approximately 20% growth in VIP GGR.”

According to Govertsen, there are a myriad of factors favouring VIP at the moment, including “more and more high-end customers returning to the market” and the fact that Macau’s junkets are “flush with liquidity, which ultimately begets greater VIP volumes.

“Effectively, what we’re witnessing is the opposite of the 20142016 downturn that saw a host of negative factors all working in concert in a downward direction.”

The VIP resurgence has been reflected by the health of Macau’s junket operators, whose numbers tumbled during the height of the city’s two-year downturn from more than 213 licensed junket operators in 2013 to just 126 as of January 2017. Those figures included a 23% decline in the number of licensed operators through 2015 (from 183 to 141) and another 10.6% decline in 2016 (from 141 to 126).

 

Meg-Star International opened a new VIP club at Wynn Macau in December

 

While current figures were unavailable at the time of print, the cursory evidence suggests a distinct reversal of that trend highlighted by the opening of a number of new junket rooms at casinos across Macau during the back half of 2017.

David Group, one of Macau’s leading junkets before trimming back its operations in 2015, suddenly re-emerged in 2017 when it announced that it would be running VIP at the new Roosevelt Hotel in Taipa, which opened its doors in July. It also launched a VIP room at Studio City and another at Galaxy.

In June, Qian Jin VIP club began operations at L’Arc while Macau Legend announced in October that it had signed an agreement with junket promoter Sheng Li V Limited to run three VIP tables in Ka Sing VIP club at Legend Palace until the end of 2019.

In December, two of Macau’s biggest junkets – Tak Chun Group and Meg-Star International – launched new VIP clubs on the Peninsula at MGM Macau and Wynn Macau respectively.

Meg-Star’s Lian Sheng VIP Club became the operator’s fifth Macau operation, having opened its fourth at Wynn Palace in April, while Tak Chun’s announcement of a return to MGM was particularly notable given that it had shut down its previous VIP room at the same property just 15 months earlier.

Tak Chun has since informed IAG that it will be opening two more VIP clubs in Cotai in early 2018.

The fact that both MGM Cotai with its famed Mansion VIP residences, and Melco Resorts’ new luxury hotel Morpheus, are due to come online in 1H18 won’t hurt the segment either.

Asked about its plans for Macau in 2018, a Meg-Star International spokesman said, “Due to the overall economy improvement and new projects entering into the market, the company maintains a positive view on the development of the Macau VIP market in 2018 for both Macau Peninsula and Cotai. The company will actively adjust its development strategy depending on the development of the market and hopes to maintain a healthy growth in coming years.”

Not all are as confident in the long-term potential of Macau’s VIP through 2018 as Govertsen’s 20% growth prediction, with Morgan Stanley tipping a more modest 11% as recently as November – although this is raised from a previous forecast of 8% “as junket liquidity remains abundant.” Notably, Morgan Stanley sees the VIP segment maintaining growth of 11% through 2019 as well.

Industry-wide consensus is that Macau’s future inevitably lies in the mass market segment, which will be aided in the coming years by improved infrastructure and more five-star hotel rooms – leading to a better quality of customer who stay longer and spend more.

However, as Bernstein analysts wrote in a recent study on Chinese consumer spending, “Considerable discussion occurs when we try to segment the market into VIP, Premium Mass and Base/Grind Mass, because the market is much more complicated. Aside from some of the clear differences between VIP and “cash” (ie. mass) customers, a case can be rightfully made that most gaming spend in Macau today is premium in nature.”

With the average gaming spend by a mass market visitor to Macau sitting between US$450 to US$550 per trip – buoyed by the fact that profit margins in the mass segment are roughly four times higher than VIP – it makes sense that this is where the greatest opportunity exists going forward.

But even with VIP eventually slowing, Bernstein expects it to grow at 5% compound annual growth rate (CAGR) over the next five years and 4.55% CAGR over the next 10.

That may not be quite as lucrative as the heady days of February 2014, when VIP baccarat alone contributed 65% of Macau’s all-time record MOP$38 billion in gaming revenue, but it at least bodes well for VIP gaming’s sustainability.

As Govertsen says, “There will always be demand for VIP in Macau.”

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