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Will New Resorts Help Macau Bounce Back?

by internationaldirector

Written By: David Winter – Corporate Finance

Casino executives are once again beginning to sound optimistic about the prospects of the gambling industry in Macau, the only region in China where gambling is legal. Macau, Asia’s gambling capital, has seen its gaming revenue shrink for nearly two years. For perspective, gross gaming revenue in Macau fell 34 percent to $29 billion in 2015 and was guided to fall a further 13 percent to $25 billion in 2016.

However, sliding revenues in Macau could be nearing their end as casino moguls such as Steve Wynn of Wynn Resorts talk of Macau showing signs of life after a tough period of declining sales. Wynn Resorts recently opened a new resort in Macau known as Wynn Palace, a $4.1 billion investment. Wynn Palace is one of two new resorts that have recently opened in Macau this year, with two more lined up for opening next year. Wynn Palace boasts 1,706 hotel rooms, a performance lake and a host of other tourist-attraction features. The resort seems to be an attempt by Wynn Resorts to boost the growth of its non-gaming revenue in Macau, both to cut reliance on gaming revenue and make up for the dwindling gaming revenue.

The other newly opened resort in Macau is The Parisian, a $3 billion project owned by international casino company Las Vegas Sands. The Parisian resort features 3,000 hotel rooms, a 1,200-seat theatre and convenience space. It is also packed with features to attract more tourists to Macau to drive non-gaming income. In addition to Wynn Palace and The Parisian, two more new resorts are under construction in Macau—one owned by MGM Resorts and the other by SJM.

The Wynn Palace and The Parisian resorts have opened at a time when fresh economic data for the month of August show a reversal in the nearly two-year revenue slide. Macau’s gross gaming revenue rose 1.1 percent to $2.4 billion in August, against the expectation of a revenue slump of 1.5 percent for the month. Though 1 percent is a small growth, the sheer sign of growth has generated massive investor excitement and shifted the debate from whether Macau can recover to how fast new resorts can drive Macau’s recovery. If the recovery in Macau hinges on new resorts, then the Asian gambling capital seems to be on track. Macau is set to get eight new resorts in the coming few years, thus boosting the tourist attraction of  the region. The genesis of problems for casino operators in Macau can be traced to increased regulation of the casino industry combined with China’s crackdown on corruption and a slowdown in China’s economic growth.

China’s crackdown on corruption has scared off many VIP gamblers from casino floors in Macau, thus dealing a major hit on the profits of casino operators, given that the bulk of casino profits in Macau come from wealthy, high-stakes gamblers. The new regulations being rolled out have increased surveillance in Macau’s casino activities, thus creating an uncomfortable atmosphere for high-profile gamblers who prefer to cover their tracks. A slowdown of the Chinese economy added to the woes of casino operators, keeping many gamblers away from casino floors, as patrons reassessed their income and spending activities to survive the tough economic times.

But can the new resorts put Macau back on its feet and spur future growth? New resorts can help increase the flow of tourists into Macau, and an increase in tourists should bring with it more gamblers, thus boosting casino activities. Because heightened regulatory scrutiny has seemed to scare away VIP gamblers, more tourist inflow into Macau should help increase the number of mass-market gamblers; they will be less frightened of the regulations that required increased transparency in casino transactions.

The opening of new resorts should provide an opportunity for Macau to diversify its revenue streams. Currently nearly 80 percent of Macau’s tax revenue comes from gambling activities. As much as new resorts such as Wynn Palace and The Parisian are seeking to boost gambling activities in Macau, they are also designed to encourage non-gaming spending in Macau. Most visitors to Macau are drawn from mainland China and Hong Kong, but attracting more international tourists should drive hotel-accommodation revenue and spur spending on other entertainments in Macau.

However, new resorts could be a double-edged sword for operators in Macau. First, investors may be expecting too much from new resorts to turn around the economic situation in Macau, and if the outcomes do not meet expectations, a wave of selloffs of casino stocks could ensue. Second, if the new resorts are adding capacity in Macau and if they can drive a meaningful growth of visitors to the gambling city, there will be a risk of new resorts cannibalizing the older ones, thus damaging business further. Third, the boost coming from new resorts may not be immediate, and this could disappoint investors interested in short-term results.

 

References
https://skift.com/2016/07/03/tourists-are-helping-macaus-casinos-bounce-back/
http://www.ft.com/cms/s/0/3d13e8b2-6422-11e6-8310-ecf0bddad227.html#axzz4KnoJZXE7
https://www.thestreet.com/story/13692371/1/melco-crown-mpel-stock-spikes-on-macau-gaming-growth.html

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1 comment

Richard October 28, 2016 - 12:50 pm

It would be interesting to see the difference between real gambling taking place in Macau and money laundering activity. I have no doubt that other gambling regions, globally, are used for the same purpose but I would be surprised if Macau does not beat them by a factor of a decent multiple.

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