Increased capacity to lift Macau, no price wars seen, Citi Research says

Citi Research remains positive over the outlook for the Macau market based on positive trends in hotel occupancy and says casino operators appear set to avoid a price war amid the current slowdown.
The positive outlook comes despite a 19 percent decline in Macau’s Gross Gambling Revenue in October, the worst drop on record as VIP traffic shriveled.
But Citi Research points to sound occupancy rates at the hotels, with more arrivals expected with the opening of new casinos in Cotai in 2015.
Apart from Las Vegas Sands’ hotels, which have 10,000 rooms with an occupancy rate close to 90 percent, other major casino hotels are almost at full capacity with 98-100 percent occupancy. At weekends, rates are close to 100 percent.
The view is that casino management believes the Macau market is supply driven, with gaming revenue growth expected to turn positive once new supply comes online from mid-2015. At that time Galaxy Macau Phase 2 is set to open followed by Melco Crown’s Studio City.
Citi Research says casino operators have learnt from past experience and are unlikely to compete on price. In 2008/09 during the financial downturn, a price war broke out as operators competed on junket commissions.
The outcome was that operators ended up suffering from narrower margins as visa restrictions hit Macau arrivals and slowed GGR growth.
Citi Research says casino management among the six operators will instead focus on improving product offerings.
The companies themselves are also expected to maintain strong balance sheets and remain cash-flow generative despite the recent weakening in GGR growth.
“We believe capex at all six Cotai projects is already fully funded and don’t see any need for the operators to make irrational moves to steal market share,” the bank said.
But concerns lie in the tight labour market and once all six major casino projects in Cotai are completed by 2018, Macau’s table count will rise by 42 percent from around 5,700 to some 8,200. Citi Research says this will lead to some 21,000 new jobs for local residents.
The outcome is that by 2018 some 25 percent of Macau residents will be employed by casinos as dealers/cage cashiers.
Moves by the Hengqin government to start work on the Macau LRT link to the island by year’s end is also expected to have an impact.
This would lead to a 24-hour border crossing between Hengqin and Macau. Citi Research says the border changes would be a positive catalyst for Macau. At present only about 8.0 percent of Mainland visitors entering Macau by land use the Lotus Bridge/Hengqin border.
Citi Research adds that as the difference in operating hours between the Hengqin border and the Gongbei border narrows, more visitors are likely to enter/leave Macau using Lotus Bridge/Hengqin border.