Inside Asian Gaming

n Macau, 90-95% of the revenues of casino operators derive from gaming activi- ties, compared to only around 50% in Las Ve- gas. Macau’s current revenue mix is akin to that of Vegas in the 1960s. Vegas moved on, and so will Macau, presumably at a much ac- celerated pace. CLSA’s Aaron Fischer predicted in his authoritative Macau Mania report that the share of non-gaming revenue in Macau will increase rapidly over the coming years,“par- ticularly as the Cotai Strip develops and casi- nos attract visitors for business conventions and family entertainment as seen in Las Ve- gas.”He predicted non-gaming “will increase to at least 25% of total revenue by 2010.” However,“given the inherent love of gaming Building the Complete Package Macau casino operators will increasingly rely on non-gaming attractions to differentiate themselves and maintain profit growth. Last month, developers broke ground on Macau Studio City, one of a number of upcoming mega-resorts that will transform the city into a more complete tourism destination in Asia, this will still be below the 50% of rev- enue derived from non-gaming activities in Las Vegas.” Good for Margins The CLSA report pointed out that “hotel op- erations typically generate an Ebitda [earn- ings before interest, taxes, depreciation and amortization] margin in excess of 70%, while food and beverage and entertainment is nar- rower than the gaming activities’ margin of closer to 50%.” The gaming activities’ margin in Macau, however, is likely to be significantly lower than that in Vegas, given the differences in the gaming markets of the two places. Slots, which have low overheads, contribute over 60% of gaming revenue in Vegas, but only 4% in Macau, where tables dominate. Meanwhile, the bulk of table gaming revenue in Macau comes from high-rollers playing VIP baccarat, and rising junket commissions are eating into casino operators’ profits. As pointed out in “A Junket Primer” in the last issue of Inside Asian Gaming : “VIP room operators used to offer their clients 0.7% of theoretical win (TW) as commission, leaving them 0.3% to cover their costs and contribute to their net margin. Now, withVIP roomoperators offering up to 1.0%of TWas commission,they have effectively given away their profit margin.” Gaming revenue in Macau is also taxed at a much higher rate than in Vegas, and rela- 11 10 tive to non-gaming revenue. Macau’s effec- tive gaming tax rate is 39% (35% as direct tax and a further 3-4% as compulsory social and welfare contributions) compared to 6.8% in Nevada and 8% in Atlantic City. Macau makes up for it high gambling tax rate with lower labour costs, however. Las Vegas Sands Corp (LVS) Chairman Sheldon explained to Inside Asian Gaming that the labour rate in Vegas works out to approxi- mately 35% of revenue, compared to 5-7% in Macau,“so overall it’s almost the same.” Excessive Returns Gaming in Macau continues booming, and in 2006, the city’s gross casino revenue over- took that of the Las Vegas Strip. LVS’ Sands Macau has scaled back its unsuccessful high- end dining facilities to make way for more gaming tables – the high marginal returns on which have thus far discouraged investment in non-gaming attractions. Following the liberalisation of Macau’s gaming industry in December 2002, Vegas- based operators made bold declarations about bringing world-class entertainment to Macau, but the theatre at Sands Macau has yet to stage performances, and Wynn Macau has left its theatre for the second phase of development. Macau had 2,762 gaming tables as of end-2006, with supply increasing 99% year- on-year, compared to the 22% growth in ca- sino revenue. CLSA estimates 2,870 gaming tables will be added to Macau’s current sup- ply by 2008, leading to a marked decline in wins per table. Macau casino operators have thus far enjoyed a windfall from a spectacu- lar gaming boom, but they will have to start pursuing non-gaming revenue and invest in transforming the city into a more complete Vegas-style tourism destination in order to continue generating healthy returns. As a slew of ambitious new casino-cen- tred properties come online over the next few years, operators will increasingly turn to non-gaming attractions to differentiate them- selves and lure visitors. The introduction of major non-gaming draws, in turn, will trans- formMacau’s tourism and gaming market. Macau currently lacks “stickability,” with the average visitor stay around 1.1 days. “There is a serious lack of non-gaming ele- ments that are needed to draw tourists to stay a day or two longer,” explains Paul Steel- man Design Group (PSDG) Asia Managing Architect James Wong. PSDG – designer of Sands Macau – has been commissioned to design the US$2 bil- lion Macau Studio City – “Asia’s first leisure resort property combining theatre, televi- sion and film production facilities, and Studio RetailTM, with gaming, entertainment and world-class hotels.” Studio City will sit along the Cotai Strip, where LVS and other Macau operators are frantically working to develop “Asia’s Las Vegas.” MrWong emphasizes the need for Macau casino operators to increase their non-gam- ing offerings:“People in the industry say the [gaming] pie is getting bigger, but the tables are increasing in number, which means ev- eryone’s profit margins will go down. Any- body who is doing a project is now looking at putting in more entertainment elements. You can thereby retain more family business and keep people here for a day or two longer. You give them more to do than just going to the tables.You give them shopping, you give them entertainment. That’s the best way for everybody to make Macau a real tourist des- tination.” Gaming Will Decline in the Mix Macau Studio City is amongst the ten larg- est casino projects currently being built in the world. Phase one of the 2,000 hotel-room I