Inside Asian Gaming

October 2015 inside asian gaming 17 Cover Story in gaming capacity region-wide over the next three to four years is less certain. Despite the much higher margins operators enjoy on mass play, Macquarie believes the surge in new supply “will lead to significant returns deterioration. … Our bottom-up analysis suggests a 510 [basis point] decline in net margins and 130 bps decline in EBITDA margins” through 2017. CLSA last month released a report zeroing in on exactly this but concluded that the region remains “undersupplied” and thus can “comfortably” absorb the addition of some 30 new casinos over the next five years. They represent a whopping 80% increase in capital expenditure against gaming revenue growth which CLSA estimates at roughly 22%. Still, the firm says, “With an increased focus on the mass market, especially in Macau, we expect Asian gaming industry EBITDA to double from US$9.5 billion to US$18.7 billion.” But, as Macquarie warns, returns will come down—in Macau from an average of 34% on existing casinos to 21% or so for the new resorts under construction or soon to open on Cotai, according to CLSA. But as their analysts note, “That 21% comfortably exceeds the average cost of capital as well as the global average ROIC for major projects in the U.S. and Australia.” What’s interesting, as alluded to above, is how closely Las Vegas is mirroring these trends, not as “major projects” go—the Strip hasn’t seen the opening of a resort built from the ground up since 2010—but in terms of the enormity of China’s impact on gaming revenue. What’s happening now, though, is that impact is waning because the Chinese economy is slowing down, and it’s harder to move large sums of money out of the country in the wake of a government crackdown on corruption, graft and capital flight that has wealthy gamblers anxious to avoid behavior that might attract official scrutiny—the same factors that have hit Macau so hard and are changing the game across Asia. THE NAME OF THE GAME You look at visitation, air traffic, tourist spend and hotel occupancy and revenue and there is much to be said for the Las Vegas Strip’s recovery from the damage inflicted by the Great Recession. Hotel, food & beverage and retail and entertainment all set revenue records in fiscal 2014. In August, passenger volume through McCarran International Airport surpassed 4 million (up 7.2% against the same month last year) for the second straight month. That hadn’t happened since before the recession. Total visitation through the first eight months of 2015 is 2% ahead of last year’s record of 41.2 million. Spending at the slots and tables hasn’t really reflected this, however. In only four of the last eight years has total gaming revenue performed better than the year before. Only in three years on the slots side. Revenues slid again, by 2.1%, in calendar 2014. But leaving that out for the moment, even the prior four years of increases weren’t enough to restore the total take to pre-recession levels. Table game revenue has been the exception, and that’s because the boom that market liberalization sparked in Macau touched off a mini-boom in baccarat on the Strip. Which is not surprising. “The vast majority of the play is from Asia,” as analyst Chris Jones of Las Vegas-based Union Gaming Research notes. “The largest segment certainly is Chinese.” What’s interesting is how closely Las Vegas is mirroring trends in Asia, not as major projects go— the Strip hasn’t seen the opening of a resort built from the ground up since 2010—but in terms of the enormity of China’s impact on gaming revenue.