China Tourist

Losing streak

Is the slowdown in Macau’s gaming revenue cyclical or structural?

Casino chips are seen on a gaming table inside a casino on the opening day of Sheraton Macao hotel at Sands Cotai Central in Macau

When the chips are down

“The scent and smoke and sweat of a casino are nauseating at three in the morning,” writes Ian Fleming in the opening line of his first James Bond novel, Casino Royale. “Then the soul-erosion produced by high gambling – a compost of greed and fear and nervous tension – becomes unbearable and the senses awake and revolt from it.”

Bond spends much of the rest of the novel trying to bankrupt a Russian agent called Le Chiffre by beating him at baccarat, a card game where players guess which of two hands will add up closest to nine. Bond loves the “dry riffle of the cards and the constant unemphatic drama of the quiet figures round the green tables”.

Until very recently the same was true of Chinese high rollers in Macau’s casinos. Like Bond, baccarat is their favourite game.

However, five months of falling gross gaming revenues (GGR) in the former Portuguese territory have prompted some soul-searching about the severity of the current downturn, particularly where the all-important high rollers are concerned. October’s figures have revealed a 23.2% year-on-year drop in GGR to $3.51 billion, the steepest monthly decline since records began.

The decline has also been on an accelerating trend since the summer. In June, GGR fell 3.7% year-on-year, followed by a 3.6% decline in July, speeding up to 6.6% in August, and 11.7% in September.

The extent of October’s fall was expected, but opinion remains divided whether the downturn has bottomed out. In a recent conference call to discuss his company’s third quarter results, gaming kingpin Steve Wynn told investors, “I don’t know if it is a squall or if we are in the rainy season, or how long it will last, but I am still very bullish on Macau.”

Other experts are less sanguine and believe the sector could be in for a nasty shock, with a large number of new casinos coming on stream along Macau’s Cotai Strip over the next three years. Traditionally new supply has prompted stock price reratings (the casinos put in new tables, and the gamblers from China soon fill them). Using past experience as a guide, many analysts believe Macau’s GGR will rebound by as much as 15% next year.

The share prices of the six key players (Galaxy Entertainment, Sands China, SJM Holdings, Melco Crown Entertainment, Wynn Macau and MGM China) are down about 25% to 30% year-to-date. But a recent flurry of buy recommendations from analysts has prompted some investors to step back into the market again.

Others warn this confidence could be misplaced. “If Beijing decides to grant Macau an extra decade of prosperity then I would say even six (Cotai) resorts is not enough,” says Ben Lee of consultancy, iGamiX. “However, the current political climate being as it is, it would seem there could be potential oversupply.”

This would not be good news for the big six, whose half a dozen new casinos will add 12,000 hotel bedrooms, a 55% increase over current capacity.

Xi Jinping’s anti-corruption drive is the main reason for falling revenues especially in the VIP segment, which accounts for about 70% of Macau’s GGR. Nor is it going away: Xinhua reported that Beijing will open up a high level anti-graft office next month.

Analysts at consultancy Union Gaming Research believe this, “represents the institutionalisation of the anti-corruption drive” and is likely to “impact Macau’s VIP market for a significant period of time”.

The government’s efforts to rein in the shadow finance sector has also had a big impact since this is where the majority of junkets finance their borrowings (junket promoters recruit affluent Chinese gamblers, often extending loans so they can circumvent Beijing’s limits on the amount of cash that can be taken out of mainland China). Some gamblers previously circumvented the rules by using their UnionPay credit cards. However, this practice has also been clamped down on since February, hitting casino revenues.

The big six must also contend with a smoking ban, which became effective on October 6. Its impact has clouded analysis of October’s revenues, since analysts suspect some of the casinos have moved chain smoking mass market players into VIP rooms where smoking is still allowed.

Rising wages have also hurt profitability. Macau does not allow the casinos to recruit non-Macanese residents as dealers and the industry needs to hire a further 14,000 over the next few years. At the end of 2013, the territory’s 25,250 strong croupiers accounted for 7% of the total workforce and over the course of 2014 have staged a number of strikes demanding higher commissions. They currently earn about half the equivalent compensation of a Las Vegas-based dealer.

Over the longer term, many commentators wonder what impact rival gambling centres will have on Macau, which recorded GGR of $45 billion in 2013, the world’s highest. Singapore currently stands third behind Las Vegas, with GGR of $6.1 billion in 2013.

But the Philippines aims to overtake the Lion City by 2020. Casinos on its 120-acre Pagcor Entertainment City in Manila are starting to open and plan to offer junket providers higher commissions than Macau. In addition, South Korea is starting to build its first integrated casino and hotel resorts to target Chinese tourists, with Cambodia not far behind. Reuters has also reported that Vietnam is planning to legalise casinos to lure high-spending Chinese across its border.

Japan, on the other hand, appears to have taken a step back. The government was planning to legalise casinos ahead of the 2020 Olympic Games. Indeed Abe Shinzo, the prime minister, has been a keen promoter of integrated resorts as part of his economic growth plan. But Reuters says the idea has been shelved following a series of corruption scandals in the cabinet.

Yet Macau is not standing still in its efforts to bring more Chinese gamblers across its borders. The forthcoming opening of a bridge linking Macau and Hong Kong (as well as China’s Zhuhai) should cut journey times and bring many more mainland visitors from Hong Kong after they have stocked up on their shopping.

Likewise, plans to increase China’s high-speed railway network should result in an influx of wealthy gamblers from inland cities beyond Macau’s traditional heartland in Guangdong. The ramp up of the new Hengqin Special Economic Zone, which abuts Macau, provides another new entry point for visitors.

In a recent interview with news website The Paper, Su Goujing, Chair of the Asian Responsible Gaming Alliance says the Macanese casino operators need to realign their strategy, concentrating less on the high rollers and more on the mass market. He cites the example of Las Vegas, where 70% of revenues come from slot machines rather than its baccarat tables.

But Chinese gamblers have been reluctant to embrace slot machines. In Cantonese they are known as “hungry tigers” that eat you alive.

The idea would have been an anathema to James Bond too. Not for him the one-armed bandit and bucket-sized serving of cola. Instead, the “solid, studied comfort of card-rooms and casinos, the well-padded arms of the chairs, the glass of champagne or whisky at the elbow, the quiet unhurried attention of good servants”.

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