Inside Asian Gaming

November 2013 | INSIDE ASIAN GAMING 9 COVER STORY Global Markets, expect the company will gradually scale this operation down as development of the Hengqin franchise ramps up. The implications for Macau, for Cotai in particular, which is just across the narrow Shizimen River, are as enormous as the numbers suggest. Once Chimelong International Ocean Resort begins taking up those 13 million visitors—and then some, 20 million or more at full build-out, Chimelong and Citi believe—even if only one in five makes the crossing, the difference will be a 20-25% increase in mainland tourism. This is huge because not only is the mainland the SAR’s largest feeder market and home to its biggest spenders, it’s also the force behind the double-digit boom in high-margin mass gaming that is revolutionizing business in the richest casino market in the world. “So all of a sudden you go from, call it maybe 7 or 8 million unique Chinese visitors to Macau annually, to double that number right next door,” says Grant Govertsen of investment brokers Union Gaming Research Macau. This is all a few years away yet. But then so is most of the new destination gaming development under construction on Cotai. The six casino concessionaires are pouring in aggregate something like US$18 billion into that. So viewed from their spreadsheets this will look quite like the perfect storm when it does break. “We believe the potential is significantly underappreciated by the market,” Citi’s gaming equities team of Anil Daswani, Minggao Shen and George Choi wrote earlier this year, “especially given the strong correlation between Macau’s gross gaming revenue andmainland China visitation rates.” “It’s mostly about visitation, driving visitation, and we’re hopeful that [Hengqin] will do that,” says Philip Tulk, director of equities research at Standard Chartered Bank in Hong Kong. “Visitation to Macau in recent years, quarters, has trailed that of the growth in betting. It’s betting that’s gone up fast over and above visitation. And that’s not a healthy trend.” What’s at stake for Macau is the long term, as Citi sees it, and clouding that are three obstacles, all of which Hengqin has the potential to ease out of the way: the first is the “border-crossing bottlenecks” between the mainland and the SAR; the second, a “lack of critical mass in terms of nearby entertainment and MICE venues and business hubs”; and the third, “limited economy-priced hotel rooms”. This last one is what most directly impacts gaming revenue, and it’s been fairlywell-documented, the fact that Macau draws visitors on the scale of a Las Vegas and an Orlando—28.1 million last year compared with 39.7 million for Vegas and 51. 4 million for Orlando—but doesn’t keep them around as long because it doesn’t have enough places for them to sleep. Orlando has more than 117,000 hotel rooms, Vegasmore than 150,000, Macau 28,000, and most of Macau’s are in casinos and classified as five-star, 68% of the total. Not surprisingly, these run at better than 90% occupancy, which is great for RevPAR come reporting time, not so great for tourists who would like to stay longer and spend more if they could. This is why the average length of stay, at about 1.1 days, hasn’t changed much over the last decade, seemingly in defiance of the billions of dollars of investment in new resort product over that time. (The average was 1.0 days in September, the latest official figures available, 1.9 days for overnight visitors, 0.2 for same-day, roughly five hours.) As the Citi analysts wrote, “The lack of hotel supply is the major reason why most visitors are day- trippers who have to return home before the border closes at midnight.” Needless to say, this isn’t going to be addressed overnight, and there is a critical element to the problem that is intractable, namely, the fact that Macau is all but maxed out for developable land. But with Chimelong’s first phase, together with a RMB5 billion ($820 million), 1,200-room resort under development by Guangdong’s Cinese Group (plans include retail, MICE and a golf course), Hengqin is stepping up. It’s illustrative to consider how the surge of visitors to the SAR from mainland China—up 20% in 2010, 22% in 2011— so quickly plummeted to +4.6% last year, +4.4% through the first half of this year, and With Chimelong’s first phase, together with a 1,200-room resort under development by Guangdong’s Cinese Group, Hengqin is stepping up.