Is the gaming sector reaching the tipping point for recovery?

May 18, 2015 16:11
A worker walks past Broadway Macau, being developed by Galaxy Entertainment, in Macau’s Cotai area. Casinos are betting that new facilities will help stem a decline in industry revenues. Photo: Bloomberg

Macau's casino industry will see new projects coming on stream in the Cotai area even as gaming revenues in city have dropped for the eleventh straight month.

Galaxy Entertainment, for instance, will launch its Galaxy Macau Phase 2 and Broadway properties on May 27.

Now, the big question is whether new properties indicate a tipping point for the industry, and if there are other factors that could be a game changer for the future.

"Over the next five years in Macau, three main drivers will move the market -- new mega-resorts, new infrastructure links with China, and yuan convertibility,” says Matthew Ossolinski, chairman of Ossolinski Holdings, a global emerging markets fund that invests in the gaming sector. 

In addition to the new properties in Cotai, Hengqin – an island 200 meters from Macau – will also offer an alternative and economical option of accommodation to visitors.

In 2013, while Las Vegas had 150,593 rooms to host a total of 39,668,221 visitors, Macau only had 23,423 rooms for 29,324,822 visitors.

Infrastructure projects such as the Guangzhou to Zhuhai Gongbei railway and the Hong Kong-Zhuhai-Macau Bridge will facilitate Macau's further integration with the Guangdong province, helping bring in more visitors to the gambling enclave.

Ossolinski also points out that a fully convertible yuan will have significant impact on Macau. A freer Chinese currency could, among things, push up gaming revenues and drive property prices higher in the special administrative region, he says.

However, some other analysts do not share the same kind of optimism.

"We see Macau as facing a demand problem rather than a supply constraint," Karen Tang of Deutsche Bank was cited by the South China Morning Post as saying.

Tang believes a bounce-back associated with the opening of Galaxy Macau Phase 2 is likely to be temporary.

Leonardo Dioko of the Institute for Tourism Studies, Macau, acknowledges the city's improvements "in the diversity of tourism product/experience offerings", but says the territory is falling short "in the variety of tourism source markets".

In March, tourists from mainland China accounted for 64 percent of a total of 2,270,585 visitors to Macau, followed by Hong Kong (22 percent) and Taiwan (3 percent).

Ossolinski argued that Macau is only undergoing "a healthy period of consolidation" and the city is transforming into "a Las Vegas-type model", in which non-gaming elements play an increasingly important role.

In this year’s policy address, Macau's chief executive Fernando Chui Sai-on reiterated the need to diversify Macau’s economy to reduce its dependence on gaming.

In the case of Las Vegas, the city’s gaming/non-gaming revenue mix changed from 60/40 percent in 1970 to 37/63 percent in 2013, according to market intelligence firm Asia Gaming Brief.

Many operators are now betting on their non-gaming business.

MGM Resorts went through a transition in Las Vegas and its subsidiary MGM China is now using art and culture as a hook to attract tourists.

Currently the MGM resort and casino complex in Macau is exhibiting the artworks of Portuguese artist Joana Vasconcelos.

In an interview to a Macau newspaper recently, MGM chief executive Grant Bowie said Macau cannot copy the Las Vegas model directly when developing non-gaming elements.

Melco Crown invested US$250 million (HK$2 billion) on the House of Dancing Water, a water-based performance theater tied to its integrated casino resort City of Dreams in Cotai.

According to a company filing, the show has been viewed by over 3.2 million guests in five years. Tickets are priced in the HK$522 to HK$1,480 range.

City of Dreams reported US$66.7 million (HK$ 517 million) non-gaming revenue for the first quarter of 2015.

In the second half this year, Melco Crown will launch a film-themed casino resort -- Macau Studio City -- in Cotai.

By the end of 2017, all six of Macau’s gaming concessionaires will have completed their multi-billion projects on the Cotai strip.

Despite the slide in Macau’s gaming revenue in recent months, Ossolinski is positive about the industry's future prospects.

"Over the last several years, most financial analysts have been consistently wrong about Macau," he said.

"The nature of their jobs demands that their focus be on the month-to-month and quarter-to-quarter. Longer term, they tend to say 'sell' when stock prices are low and 'buy' when they’re high."

Ossolinski says he recalls a similar period in 2009 when investor sentiment toward Macau was weak during the global financial crisis.

Many analysts had advised investors to pull out of the sector, making a wrong call, he said, pointing out that the casino plays had in fact rallied -- by as much as 2000 percent in some cases -- since then.

"If you believe in Macau’s long-term growth story, this is a rare buying opportunity," says Ossolinski.

-- Contact us at [email protected]


an independent contributor and consultant