Build it, but will they come?

Tougher times for casinos

Talk about betting on red. Macau – the world’s largest gambling hub – has suffered nine straight months of revenue declines, culminating in a worst-ever 49% year-on-year fall in February.

That sounds like awful news for a territory that saw its economy shrink by an alarming 17.2% year-on-year in the final quarter of 2014.

Casino share prices have already halved since last year, although they rose slightly on news of February’s record red ink because analysts expected even more of a bloodbath.

WiC has covered the sources of the slowdown previously, including tighter visa restrictions, bans on smoking and clampdowns on the illicit usage of Chinese credit cards.

But even more seriously, business from higher-roller players has been battered by the weaker economic mood in China, as well as the unexpectedly persistent attentions of Xi Jinping’s anti-graft campaign.

Many of the junkets that facilitate business with the VIP gamblers have shut up shop, and the casinos are trying to canvas customers directly rather than through the middlemen.

In the past Macau was often described as a supply-driven market, says Charlene Liu, an analyst at HSBC. Each time a new casino opened, it was deluged with willing players. Revenues surged, growing the total market and supercharging the local economy.

Now with six new properties set to debut on the Cotai Strip, the heart of gambling activity in the former Portuguese enclave, the hope is that Macau will get another much-needed boost.

The openings kick-off in May with the $2.5 billion extension to the Galaxy Macau and that same group’s The Broadway (modelled on the US theatre district); they conclude with the $3.8 billion Lisboa Palace in late 2017. In total, some 3,300 new tables and 12,000 hotel rooms will be added during the three-year upgrade.

But does this ‘build it and they will come’ mantra still hold true, especially as Liu and her colleagues at HSBC have forecast another 21% decline in gaming revenue this year?

Liu says 7% revenue growth will be required every year for the new properties to break even, based on last year’s performance.

Macau should be able to grow revenues at this rate, she thinks. But she is more doubtful about meaningful increases beyond break-even, and she sounds cautious about betting the house on a more positive outcome.

“The risk-reward dynamic remains unattractive to us, and we wait for either better visibility on revenue trends (such as, when we have more confidence in the potential pick-up in revenue growth) or lower valuations to get into the Macau operators to justify the potential downside risks,” Liu explains.

One possibility is that most of the new casinos will fill up with mass-market customers, or visitors who bet less at the tables. New arrivals from the ‘premium’ mass segment – players at higher-limit tables, sometimes known as ‘tuhao gamblers’ because of their willingness to flash the cash – may be less forthcoming. Ditto for business from the VIP sector, the highest-spending customers.

Despite this, Francis Lui, deputy chairman at Galaxy, has professed his confidence about the prospects of his two new venues.

“We are optimistic that the new facilities will make revenue grow. They will stimulate our revenues and the market again,” he insisted.

This outlook was based on demand from China’s emerging middle class, Lui explained.

“Previously, it was estimated that in 2020 the Chinese middle class would be 400 million people. Now, predictions are that it will be around 700 million people in 2020. We are very confident because we have a very secure client base,” he said.

Against this bullishness, the Apple Daily reports on another statistic that reveals how much gambling demand has dried up: some of the baccarat terminals at the existing Galaxy casino have reduced their minimum bets to HK$50 ($6.4), when two years ago the amount was a far costlier HK$500.

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