Inside Asian Gaming

INSIDE ASIAN GAMING | May 2012 14 Cover Story A US$5 billion machine market? The potential is there, according to some “Much of the market, in terms of number of units, hasn’t grown as quickly as might have been expected,” says veteran analyst David Green, principal of Macau-based Newpage Consulting.“A few years ago, there were some suppliers who thought it would be a 30,000-40,000 machine market.” Last year, the number of units grew about 14% year-on-year. Gross revenues increased by more than twice that, to 32.6%. In the first three months of this year, mass-market gambling—tables and slots—grew 35.6%, while VIP was up 23.7%. It was the second consecutive quarter that the rate of mass growth outstripped that of VIP. Through the first quarter, Las Vegas Sands Corp’s Sands China subsidiary, which derives a greater proportion of its revenues from the mass market than its competitors, reported a 67% increase in slot handle at The Venetian Macao on the Cotai Strip and a 50% increase at Sands Macao, which is located near the main ferry terminal on the peninsula side of the city. Galaxy Entertainment and Melco Crown Entertainment are likewise doing gangbusters. Across the street from The Venetian and next door to LVS’s new Sands Cotai Central, Melco’s City of Dreams reported a 34% increase in slot handle in the first quarter. Slot handle at the 1,500 EGMs at Galaxy Macau, which opened on Cotai last May, exceeded HK$10 billion. On the peninsula, SJM posted a healthy 10% increase in slot revenue in the first quarter on a same-store basis. Wynn Macau, which removed 85 machines earlier in the year, saw handle drop slightly (0.6%) but still generated an impressive US$871 in average win per day across 924 machines. Slot volume grew 27% at MGM China Holdings over the period, outpacing the market by 100bps. Then there is Mocha Clubs, which operates a citywide chain of 10 slot parlors, some in hotels, some in standalone facilities, as a division of Melco Crown. Revenues from Mocha’s 2,100 or so slots and electronic table games grew 10% in the first quarter to US$37.3 million. It’s a thriving trade in high-repeat local players that runs at EBITDA margins of 25% or better by emphasizing convenience and service. Anthony Yip, vice president, Gaming Product & Planning, says his customers consider their time spent at Mocha’s venues as “entertainment”. “Lots of people don’t want to go to the casino because the service isn’t always there. In the casino, if you’re not a VIP it’s not easy to get service. But here they know they will be taken care of. The Chinese need the ‘face’. They really enjoy that. And we’re not really tough on [return to player]. Because these are not one-time players. We offer them something a little more to make them feel better.” UnionGaming’s Grant Govertsen expects visitation to Macau to increase 10-15% this year to 32 million, and he projects that“high- margin mass-market gross gaming revenue” will grow at double that rate, implying a mass market that will be US$2.5 billion to $3 billion larger than it was at the end of 2011. Growth in slot revenues could easily exceed $450 million. Deutsche Bank analysts Carlo Santarelli and Kelly Knybel estimate a doubling of total Macau GGR over the next five years to US$62 billion. Conceivably, all the projects in the current Cotai pipeline, of which there are seven (including MGM’s and SJM’s, which have yet to be granted land approvals), could be open within this time frame. But this presumes a pace of development which itself is a puzzle of many complex pieces. How they ultimately fit together depends on the limitations of the labor market and the willingness of the powers that be to address that by taking on the politically volatile issue of immigration. A lot depends also on the speed at which an already overburdened transportation infrastructure can expand to meet the market’s needs. There is finally the question of how tightly the local government, and ultimately the central government in Beijing, will try to control growth in order to forestall the possibility of social disruption. Assuming Cotai progresses as envisioned—seven new resorts between now and 2017—Macau could be a 24,000- plus machine market easily worth US$5 billion at current average daily win rates. Mr Crisafi believes slots could be 10% of the overall market by time. “People are going to start looking at time on device, the entertainment factor,” he says. He is not alone in this view. “We’re more excited about the mass- market growth story than VIP,” says Mr Govertsen.“Youwill see very healthy double- digit growth rates into the foreseeable future, the next five to 10 years, the benefits of whichwill accrue not only to the operators but to the suppliers. We’re talking about many tens of thousands of slot machines.”