Hengqin: Beacon of hope for China's Vegas?

Brian Yeung February 13, 2016 08:02

Macau, which overtook the Las Vegas strip to become the world’s biggest gambling hub in 2006, has been experiencing year-on-year declines in casino gross gaming revenue (GGR) over the past 20 months.

Against the backdrop of China’s anti-corruption campaign and Macau’s falling VIP gaming market, the special administrative region is counting on Hengqin – an island 200 meters away yet three times its size – for its transition to the Las Vegas model, in which mass market and non-gaming components play an increasingly important role.

Being a part of Guangdong province where gambling is not allowed, Hengqin is expected to develop non-gaming attractions that may help Macau move away from a gaming-focused economy.

“Expansion into Hengqin is a continuation of the critical mass model that has been envisioned and executed on the Cotai Strip over the past 10 years,” says Matthew Ossolinski, chairman of Ossolinski Holdings, a global emerging markets fund that invests in the gaming sector.

“Hengqin Island will add more capacity: hotel rooms, convention space and entertainment capacity in future years,” he explained.

But what remains unclear is whether Macau faces a demand problem or a supply constraint and how Hengqin might fill the gap.

In fact, Macau’s total visitor arrivals went down 2.6 percent from 31.53 million in 2014 to 30.71 million in 2015, according to the Macau Government Tourism Office.

For Ossolinski, the real issue is not about falling demand but government policy, citing Macau’s visa policy as an example.

He said: “The day that Macau faces a demand problem is when all 1.4 billion people in China are allowed to enter Macau when they desire. The number of Chinese visitors is severely restricted and closely controlled.”

Compared to Las Vegas, Macau had a lower level of penetration to the national population.

In 2014, over 41 million domestic tourists visited Las Vegas, amounting to nearly 13 percent of the US population.

Macau attracted approximately 31.5 million domestic tourists in the same year, which was only about 2 percent of China’s total population.

Given the fall of Macau’s ongoing YoY declines in casino GGR, the past year has seen a sign of easing in visa policy. For example, the Macau government reversed limits to mainland visitors who enter Macau via transit visas last year.

Meanwhile, the improving transportation infrastructure is expected to bring more visitors to Macau via Hengqin.

Currently the border between Hengqin and Macau is open 24 hours a day. And some infrastructure projects in the pipeline such as the Hong Kong-Zhuhai-Macau Bridge and the expanding national high-speed rail network will make Macau more easily accessible and connected to other Chinese cities.

According to data from COTRI China Outbound Tourism Research Institute, Chinese outbound tourism continues to grow but Chinese tourists are more eager to go elsewhere other than other Chinese cities.

Wolfgang Georg Arlt, the institute's director, said: “There is a tendency for Chinese tourists who have more money and experience to explore new destinations, especially if they are not looking for gambling.

“If they go to Macau for a family trip, they are likely to be one-time visitors. So Macau needs to come up with new ideas to bring people back.”

He said visitors’ overnight stay, customers’ spending and businesses’ profit margin are more important than tourist visitations on its own.

He said: “While most politicians talk about the number of tourist arrivals, what really matters to the tourism industry is how many nights do tourists stay, how much do they spend and how much margin businesses earn from them.”

As such, the big question for Macau is how to attract high-end tourists to stay longer and spend more to compensate for the loss of VIP gaming revenue, which remains a major component of Macau’s tourism revenue.

Notwithstanding these challenges, Ossolinski believes Macau’s transformation is underway and Hengqin has a role to play.

Says he: “Hengqin will add needed capacity and ease strain on infrastructure. But aside from just bringing more hotel rooms into Macau’s mix, it will expand the whole appeal of the place: an Orlando and a Las Vegas all in one place.”

In fact, Hengqin’s first resort Chimelong Ocean Kingdom, dubbed “the world’s largest aquarium” by Guinness World Records, drew 5.5 million visits in its first 11 months of operation since it was opened in January 2014, according to TEA/AECOM 2014 Theme Index.

Compared to Ocean Park Hong Kong, which already has 39 years of history, the figure of Chimelong Ocean Kingdom is only 30 percent less.

That seems to offer a good reason to stay positive.

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BY/JP/CG

Brian Yeung

an independent contributor and consultant