VIP growth spurt seen sputtering

Macau’s VIP market, which was crushed by Beijing’s anti-corruption campaign, has bounced back, unexpectedly leading gross gambling revenue growth in Q1.

The VIP segment recorded MOP35.5 billion ($4.43 billion) in gross gaming revenue for the three months to end- March, growing 16.8 percent yearon- year, and 6 percent sequentially, according to figures from the Gaming Inspection and Coordination Bureau (DICJ). The growth figures outstripped that of mass revenue, at only 7.9 percent in the quarter.

The VIP sector has historically dominated gambling in Macau and at its height in 2011 accounted for almost three quarters of total revenue. It was the high rollers fueled by the junket system that helped propel Macau to a more than $45 billion market at its height in 2013. However, China’s campaign to crackdown on corruption extended from officials to reach into all sectors of society, triggering an exodus of VIP gamers concerned about appearing on Beijing’s radar.

The government in China and Macau has pushed the six operators to diversify their revenue base to provide more non-gaming offerings and to appeal to the mass market. Their efforts have been paying off, with the mass market leading a recovery in GGR from August last year after 26 monthly declines. Mass gaming now makes up more than half of total market revenue.

That was until Q4 of 2016, when VIP growth once again accelerated, surprising analysts with a 10 percent increase.

“This then marks the third consecutive quarter of mass growth in the 11 percent to 12 percent range and is encouraging in the context of a stable mass-anchored recovery,” Union Gaming wrote in a note.

“This also represents the first time in nearly six years (11Q3) that VIP grew at a faster rate than mass. Digging deeper into the numbers, it has become clear that the high end of the market has rebounded – and we would apply this to both VIP and premium mass,” it added.

Meanwhile, slots GGR also saw positive numbers, growing 13 percent year-on-year in the quarter, the highest level of growth in nearly four years.

“While the gut reaction would attribute most of the strength in slots to the fact that Macau is “on sale” and budget-conscious gamblers can get a cheap room, we also believe that high-end / VIP slots are also outperforming,” Union Gaming says.

Despite the recent figures, most analysts say the outperformance is unlikely to be sustained in the notoriously volatile sector and the mass market is still the future of Macau gaming.

Debtor database awaits data protection greenlight

Macau’s debtor database is still awaiting approval of the Office for Personal Data Protection before it can start operations. “The IT structure is in place and ready to go. What we’re missing is the go ahead from the Office for Personal Data Protection. Once the system is cleared, then data can start to be inserted into the system,” said Gaming Inspection and Coordination Bureau director Paulo Martins Chan to TDM. The junket proposed debtor database, which was first announced in November last year, contains the details of high-rollers that owe overdue debts.

Gaming tax revenue rises 

Macau’s government raked in a total of MOP 14.1 billion (US$1.8 billion) in gaming taxes in the first two months of 2017, according to data from the Financial Services Bureau. The figures represent a 5.4 percent year-on-year growth compared to the same period in 2016. The government has estimated that it will collect around MOP 71.9 billion in taxes in 2017.

Bernstein Research estimates the VIP segment will head for 7 percent growth in 2017, with continued strong performance in the first half giving way to a drop of 3 percent in the second.

“The strong VIP performance in late 2016 and early 2017 has mainly been driven by accelerated capital outflows from China, strong liquidity in China and the strength in China’s real estate market. These factors which supported VIP growth, however, are short-term catalysts rather than long-term structural benefits,” it said.

Bernstein sees the VIP market ultimately gaining at a compound average rate of about 4 percent through the end of the decade, but warns any changes in government policy could create significant deviation and volatility.

Wells Fargo analysts agree, saying the rally could stall once the effect of China’s economic stimulus and housing bubble wears off. “We continue to think loose credit and housing have been driving the market recovery. We think continued curbs on housing speculation and slowing of credit will impact revenues later in the year,” it said.

Bernstein also notes, the higher VIP revenue appears to have come from mid-tier and lower VIP customers, rather than a return of the whales. Based on talks with junkets, it notes that there appears to be increased visitation rather than a major rise in spending.

The outperformance in VIP has also been helped by new property openings, in particular Wynn Resorts’ Wynn Palace on Cotai, which held its debut in August last year. In the second half, MGM Resorts is scheduled to open its MGM Cotai property, which is slated to be mass market only, while ultra-high end hotel, The 13 is expected to open in July and will be one of the most expensive hotels ever built, with a cost per key at about $7 million.

Morgan Stanley is projecting 9 percent overall GGR growth for 2017, with mass growth However, it notes that the VIP estimate may be conservative.

The firm also points out that the rebound in VIP is likely to come at a cost with higher promotional expenses leading to possible margin erosion.

“Promotional allowances rose to a recordhigh level in 16Q4, so did advertising and marketing expenses in 16H2, rising for the first time in two years. Together with VIP revenue growing faster than mass, we see margin pressure in 2017,” it said, adding that mass will need to gain by at least 10 percent to maintain margins.

SJM Holdings

SJM Holdings (880:HK) has 20 casinos on the Macau Peninsula. The company is currently building The Grand Lisboa Palace on Cotai, which is scheduled for opening in H1 2018. The casino’s original plans were for 700 gaming tables and over 1,200 slot machines across a gaming floor area of approximately 27,000 square metres. Analysts at Bernstein say the company is facing near-term headwinds as it is coming late to Cotai and has significant exposure to low quality peninsula-based satellite properties. In March, the company opened a new gaming space on the first floor of its Grand Lisboa property as part of an ongoing revamp. The new area includes 870 square meters of space, with 10 gaming tables and over 40 slot machines as well as a dining area.

Morgan Stanley estimates EBITDA could rise 7 percent quarter on quarter driven by mass revenue at Grand Lisboa and Jai Alai (opened 35 tables in December 2016).

Galaxy Entertainment Group

Galaxy Entertainment Group (27:HK) has three main properties and runs three City Club casinos inside hotels. The company’s Galaxy Macau Phase 2 and Broadway at Galaxy Macau opened on May 27, 2015, almost doubling the capacity of the resort. The operator said it continues to move forward with Cotai Phase 3, with the potential to start construction in late Q1, or early Q2. It also said it is moving ahead with plans for a low-density IR on the neighboring island of Hengqin. The group posted Q1 revenue of HK$13.4 billion (US$1.7 billion), up 1 percent sequentially and down 2 percent year on year. Adjusted EBITDA was HK$2.4 billion, down 2 percent sequentially and up 6 percent year on year. A gain of 12 percent in adjusted EBITDA at Galaxy Macau was offset by a 15 percent decline in the same measure at the StarWorld Macau resort. Bernstein Research said the results were slightly better than it had expected, but noted that the company is still underperforming its true potential in the mass market sector.

Sands China

Sands China (1928:HK) has five properties in Macau. The new $3 billion The Parisian opened in September and received a highly positive reaction from analysts. It features a scale replica of the Eiffel Tower, nearly 13,000 hotel rooms, two million square feet of retail-mall offerings and two million square feet of MICE capacity.

The company recently announced its retail line up for another 170 shops. Sands was still only awarded 100 tables at the open, like the VIP-focused Wynn Palace. The company recently announced a new program to help support small and medium sized businesses, which will include invitational matching sessions for businesses to connect with Sands China user departments. To be known as the F.I.T. programme, it will target small and micro companies, “Made in Macau companies and Macau young entrepreneurs. The company will provide financial support, targeting Macao young entrepreneurs with a staff of 15 or below, providing them with a 30 percent advance payment on purchase orders.

Bernstein Research notes that Sands’ product positioning focused on mass and its location advantaged inter-connected properties on Cotai are a key value driver.

Melco RESORTS & Entertainment

Melco Crown Entertainment (6883:HK) is changing its name to Melco Resorts & Entertainment. The company has three casinos and the Mocha Clubs. Melco International Development recently acquired an extra US$1.1 billion worth of shares in the company taking its stake to 51.3 percent stake, compared to 37.9 percent before. This follows the decision of partner Crown Resorts to sell down its holding.

Despite a slow ramp up, the company’s newest resort, the Hollywood-themed Studio City, is now making a strong contribution to results. The property opened with only mass tables, but has added a small VIP operation since November.

The company recently announced its City of Dreams will rebrand the existing Hard Rock Hotel to “The CountDown”. The name change is expected to take effect from July 2017 until March 31, 2018 with a countdown clock timed to the unveiling of a new phase of development of City of Dreams. April 2018 will mark the opening of Macau’s new landmark: Morpheus, a new iconic luxury hotel designed by the late Dame Zaha Hadid.

Morgan Stanley expects Melco to report a 14 percent quarter on quarter gain in property EBITDA in Q1, with Studio City property EBITA up 23 percent. The firm notes it is 18 percent above consensus on the company.

Wynn Macau

Wynn Macau (1128:HK) opened its $4 billion Wynn Palace in Cotai on August 22 after facing construction delays. The company’s original property is on the Macau Peninsula. The Wynn Palace has 1,700 hotel rooms and 90 percent of the resort will be non-gaming. Although its properties are seen as at the higher-end of the market, recent research from Morgan Stanley based on Google searches suggested it may outperform in the mass sector. The brokerage notes that Google searches for Wynn’s Macau properties have recently surpassed that of Galaxy and Melco Crown’s properties - a potential leading indicator for much higher market share. While Wynn’s mass market share has increased from 8 percent to 10 percent in 16Q4, it is still far below Melco and Galaxy Entertainment’s of 18 percent, suggesting potential upside, the firm said.

MGM China

 

MGM China (2282:HK) is operating a single casino on the peninsula. The opening for its new $2.9 billion development, the MGM Cotai, has been pushed back from late 2016 to the second half of 2017. The resort will not feature any VIP rooms at the opening and will focus on mass gaming, while its original property will continue to offer VIP services. MGM Cotai will have approximately 1,500 hotel rooms and suites, meeting spaces, high end spa, retail offerings and food and beverage outlets. The project has a jewellry-box design and 85 percent of its gross floor area will be dedicated to non-gaming facilities. It will also feature a permanent collection of more than 300 Asian and Chinese artworks. MGM Resorts International in March announced the appointment of Aaron Fischer as chief strategy officer. Fischer, who is presently based in Hong Kong and serving as senior vice president of corporate development for MGM Resorts, has been working closely on strategies for the global development of integrated resorts in Asia. He will relocate to the company’s corporate headquarters in Las Vegas. Bernstein notes that the company will face near-term headwinds as it loses market share to other Cotai properties, but the opening of its own resort gives it the largest incremental expansion of all the properties with respect to footprint, room inventory and gaming capacity; however, full value from the property is still a ways off.