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Building a Better Macau

With a two-year recession behind it, Macau is relying less on big-spenders, more on mass market

Building a Better Macau

Back in 2014, Macau’s gaming industry seemed like the bet that couldn’t lose. Andrew Klebanow remembers it well.

“Macau was going at a run rate of $47 billion a year,” recalls Klebanow, partner with Global Market Advisors. “At G2E that year, I said at the current rate, Macau could be a $100 billion market by the mid-2020s.

“The next week, we were off the cliff.”

It was a long way down. The first tremor came in in June, with the market’s first year-on-year decline since 2009. That 3.7 percent drop was followed by a 3.6 percent decrease in July. And so it went, month after dismal month, for more than two years. In 2015, the industry lost a staggering 34.3 percent in GGR. All in all, the epic downturn robbed Macau’s lifeblood industry of some $100 billion in value.

Today, the territory is bouncing back, with double-digit gains in many months driven both by VIP and mass play. But this recovery feels different. Remembering the exodus of high rollers during the recession, operators have acknowledged that mass gamblers, and even non-gamblers, may be the real VIPs.

 

The Big Drop

In the past, Macau relied on gaming for up to 80 percent of its economic sustenance. But that house of cards was built primarily on VIPs, the big-spending baccarat players brought in by Macau junket operators.

Then along came Chinese President Xi Jinping, who took power in 2013 and promptly cracked down on corruption and capital outflows from the mainland. Uneasy under the government microscope, VIPs took flight.

“People who had money no longer felt comfortable displaying it; those who continued to gamble went to other jurisdictions,” says Klebanow. “NagaWorld in Cambodia enjoyed robust growth, in part predicated by the shift of gamers going to that destination. You saw gaming revenue growth at Entertainment City in the Philippines (where at the time, casinos were not even subject to anti-money laundering regulations).”

Xi’s solution was straightforward. He told Macau to grow its economy beyond gaming, or else. “Focus on building a global tourism and leisure center,” said the PRC president in 2014. “Promote the Macanese economy’s appropriate diversification and sustainable development.”

The decline was grueling, but could it be worth it if it leads to a more resilient economy? Maybe.

“These sorts of growing pains are difficult for everybody,” says Michael Zhu, senior vice president of international operations planning and analysis for The Innovation Group. “We’re facing a new phase where we have better growth on the mass segment and are diversifying the hospitality program to offer more than just gaming. It’s still more or less a VIP-led recovery, at least so far, but the gap between the recovery rate of VIP and mass is getting smaller. It wouldn’t surprise me if the gap disappears in the coming couple of months.”

He agrees that too much growth on the VIP side could bring renewed scrutiny—and possibly another crackdown from the central government.

“Compared to the mass segment, VIP growth or recovery is more risky in that it’s more sensitive to the political climate. One word from Beijing and the picture could change quite substantially. There are different opinions over who’s leading the recovery, but I want to see a better balance. I would rather see mass-led than VIP.”

While there’s an “allure” to VIP players with their ostentatious displays of wealth, “it’s a low margin business,” says Klebanow, “15 percent, whereas premium mass and mass is more like 30 percent.”

Besides, there are also a whole lot more mass players—potentially millions of upwardly mobile Chinese who have yet to make Macau a destination.

“As China’s economy continues to grow, its people aspire to achieve upper middle class and upper class status,” says Klebanow. “There are not a finite number of people who want to go out there and gamble. If you look at travel tourism trends in that region, more Chinese mass market and premium mass market consumers are getting on planes and going places.”

Though some patronize jurisdictions outside Macau, “there’s enough to go around,” he says. “What we’re seeing is this consistent growth throughout the Southeast Asian region.”

Speaking of diversification, he adds, Macau’s Big 6 gaming concessionaires were mixing it up even before the downturn. “All the projects you see on Cotai were in the planning and construction phase long before 2014. Wynn Palace was out of the ground. MGM Cotai was out of the ground and getting built. Walk on the Cotai Strip today, and you’ll see a wealth of really stupendous non-gaming amenities. It’s incredible. It surpasses what we do in Las Vegas.”

 

Playing the Long Game

Speaking of Las Vegas, it seems the world’s No. 1 gaming town can learn a lot from No. 2. In 1989, Vegas reaped 60 percent of total revenues from gaming, 40 percent from non-gaming. Now with a 35/65 split, many analysts say it’s a healthier economy—not bomb proof, but better equipped to ride out market turbulence.

Macau could follow the same model up to a point, says Zhu. “Operators have established better programs on the non-gaming side: more hotel rooms, better food and beverage options, more entertainment, really creating more attractions for non-gaming visitors.”

But don’t look for Macau to become Disneyland. “It’s not a family orientation that is leading mass growth. It’s better penetration into the secondary and tertiary markets in mainland China,” says Zhu. “More provinces in central and northern China are showing pickup in the penetration level, with more people going to spend long weekends or the Golden Holiday week in Macau.”

VIPs will continue to be a mainstay, according to Klebanow. “I never see junkets going away; they’re pretty much partners in the gaming industry, which relies on them to bring customers into the property. What we’ve seen is consolidation among junket providers. At their peak, there were 250 junket promoters. There might be 110 now. A lot of the smarter operators went out of business or consolidated. There are fewer junket providers in Macau, but they’re bigger and far better capitalized.”

Beyond VIPs, “what we love is premium mass customers”—enthusiastic gamblers who bring cold hard cash or the equivalent, and don’t rely on credit to get in the game, he says.

The question remains: Could Macau one day become the $100 billion market of operators’ and investors’ dreams?

“Yes, it could it achieve that, but it’s not a traditional market economy, and there will always be constraints that preclude Macau from achieving that economy at a normal growth rate,” says Klebanow. “It also depends on how much more gets built. There’s still a lot of open area on Cotai. Wynn Palace has additional stages planned and certainly Las Vegas Sands has additional phases planned. There’s room to build if demand warrants it.”

Zhu notes that the government is also casting a wider net in terms of visitors. “Instead of attracting people from Macau only, I think there are various campaigns and promotional efforts to attract people from a bigger region including those from India and the Middle East.”

Closer to home, there’s a massive pool of gamblers and tourists still to be tapped, Zhu adds. “If you look at China’s total population, even given the income strata in many provinces and cities, there is still a large population that is underserved, who visit Macau less than once every year or other year. So there is still a large tourism base to materialize.”

The government may even give the green light to a seventh concessionaire in Macau, he says. “We are still far from the market being saturated.”


Putting the ‘Cool’ in Macau
Q & A with Lawrence Ho, Chairman and CEO, Melco Resorts & Entertainment

“We’ve always looked at ourselves as an entertainment company, unlike some of our competitors that are very focused on the casino business.”

Those are the words of Lawrence Ho, chairman and CEO of Melco Resorts & Entertainment. In interviews about Melco’s ventures in Macau, Manila and elsewhere, Ho continues to emphasize the cool quotient—non-gaming, high-tech, entertainment-based attractions that appeal to far more than traditional slot and table game players.

We asked Ho to weigh in on what he terms “the new Macau.”

GGB: Macau’s ongoing recovery has been attributed both to returning VIPs and also to mass customers. What’s your view?

Lawrence Ho: Even though we’ve seen strong performance in the VIP gaming sector, we’ve made a conscious choice not to be solely reliant on rolling-chip revenues, as our long-term view is that future growth in Macau will be driven by the premium-mass and mass segments. Melco has always been positioned to address the mass and segments beyond gaming. Together, they make up approximately 90 percent of our EBITDA.

That’s why we’re launching a revamp of our City of Dreams properties in Macau, providing offerings beyond gaming to address mass customers, such as the growing middle class in China and traveling families.

Will more non-gaming attractions draw more non-gamblers?

Melco has always been committed to offering Macau’s most fully integrated and modern gaming and entertainment experience, capturing the increasing non-gaming demands from both gamers and tourists. In fact, 98 percent of our cap-ex in 2017 was focused on non-gaming investments.

Building our existing entertainment offerings beyond gaming—such as the world’s largest water extravaganza, the House of Dancing Water, as well as strong retail and dining—we launched our first original hospitality brand Nüwa at the end of 2017, replacing the former Crown Towers at City of Dreams in both Macau and Manila.

We anticipate the opening of our new signature hotel Morpheus, the world’s first free-form exoskeleton high-rise designed by the late Dame Zaha Hadid, in the first half of 2018. The centerpiece of City of Dreams’ Phase III will be an icon of the new Macau, adding almost 770 new luxury rooms, suites and villas, on top of new restaurants, retail and entertainment concepts.

Morpheus will be the second Melco-original hotel brand, and we expect its launch to further solidify our leadership position in the premium-mass market segment in Macau.

That aside, we’re also supporting new platforms like eSports. Studio City recently partnered with digital entertainment company Garena to host the 2018 League of Legends Master Series Spring Final, one of the most popular eSports gaming leagues in this fast-growing segment, which has a large audience of millennials.

Macau may never be Vegas, with non-gaming revenues outstripping gaming, but do you see long-term benefits in an economy that’s not so reliant on gaming?

A diversified economy is very much in line with the thinking around the transformation of Macau into a world tourism and leisure destination. To achieve that, strong entertainment beyond gaming is integral. An increase in visitors would boost our revenue and the overall Macau economy in the long run.

What’s your outlook for Macau long-term?

We’re optimistic, and particularly excited with infrastructure developments improving ease of access to our properties. For example, soon you’ll be able to get to Macau from Hong Kong International Airport within 20 minutes, or ride the Macau Light Rapid Transit throughout Cotai.

The market is stabilizing into a more diversified tourism market, and revenues should likewise balance over the long term across gaming and non-gaming.


Q & A with Grant Govertsen
Managing Director, Union Gaming Asia Securities Ltd.

GGB: Does the first quarter of 2018—with overall GGR up 20.5 percent, and VIP and mass also up in the 20 percent range—bode well for the year?

Grant Govertsen: It does. The market remains very robust and has now recorded six consecutive quarters of double-digit growth and four consecutive quarters of growth above 20 percent. It’s not unreasonable to think that the market can grow in the high teens for the whole of 2018.

Is there a built-in disadvantage to too much VIP growth?

It could result in another bubble that at some point would burst, and it’s possible that a very high VIP growth rate could draw the attention of Beijing and lead to actions that rein in the market. This time around, junkets seem to be behaving more maturely and are not putting the entirety of their liquidity to work in creating ever higher rolling-chip volumes. Rather, they are becoming institutionalized—for example, Suncity.

What has the market learned from the 2014-16 downturn?

I think it’s in the operators’ best interest to continue to develop non-gaming attractions regardless of government mandates.

While Macau is a “gambling town,” when you look at the revenue mix of gaming and non-gaming, it’s non-gaming that’s becoming a differentiating factor. Gaming is a commodity; there’s no difference in a game of baccarat at any of the casinos. Non-gaming is an element that can be employed to drive the customer to the commodity. Therefore, it’s incumbent upon the operators to better understand the wants and needs of their core customer base and develop non-gaming amenities accordingly.