Times a-changing

Gaming revenues are expected to continue their southbound journey in 2015, analysts say. However, they believe new properties slated to open this year in Cotai bode well for the industry. The decline in gross gaming revenue can also mark a new era for non-gaming attractions here, they tell Macau Business.
Chief Executive Fernando Chui Sai On has said he expects gross gaming revenue in Macau’s casinos to fall to MOP27.5 billion (US$3.45 billion) per month this year. Mr. Chui recently told reporters that the government had foreseen the slump and had adopted contingency measures, making appropriate financial arrangements beforehand. 
For the first time in more than five years, monthly casino gross gaming revenue fell year-on-year for seven months in a row. Tim Craighead is director of Asian research and senior casinos and gaming analyst at Bloomberg Industries.
He expects the city’s gross gaming revenue to range between -5 per cent and flat. However, he says there is likely to be a significant difference between the first half and the second half.  
“The first half of 2015 may continue to decline at more that 10 per cent due to continued challenges with anti-extravagance, the smoking ban, Chinese economic growth, declining housing prices, etc. The second half may see notable acceleration due to progressively easier year over year comparisons, new resort openings and improving economic growth following the current stimulus measures”, he says.

Modest returns
On the contrary, Union Gaming Research Macau calls for a “modest return to growth” in 2015. “There are many industry analysts who believe that 2015 will be another year of decline in GGR. We believe it will be up slightly,” analyst Grant Govertsen says.
He forecasts a total gross gaming revenue increase of seven per cent. ‘Our new 2015 forecast calls for VIP +3 per cent, mass +13 per cent, and slots/Electronic Table Games +6 per cent. At the same time, our market-wide EBITDA [earnings before interest, taxes, depreciation, and amortisation] growth forecast is also at 7 per cent and does not reflect any of the typical operating leverage associated with a greater mix of higher-margin mass market business’, the company says in a report.
Even so, Mr. Govertsen says this scenario in the local gaming industry is of concern to investors, hence the significant declines in share prices since the beginning of the year. However, it is not a sign of stability, he says. 
“What it appears to be is a new normal where the VIP market has in all likelihood permanently changed following the anti-corruption campaign”, he posits.
Macau Polytechnic Institute Gaming Teaching and Research Centre associate professor Carlos Siu Lam says as the VIP sector contributed about two-thirds to gross gaming revenue, it would stay at 2011 to 2012 levels. 
Casino takings in 2011 were MOP304.1 billion and MOP 267.9 billion in 2012. 
“This is going to be affected by such factors as the sustainability, forcefulness and measures taken in the process of the anti-corruption campaign. On the other hand, the opening of new properties in 2015 can do some good for gross gaming revenue”, he says.

New kids on the block
Three projects are slated to open in Cotai this year. Melco Crown Entertainment Ltd. will open Macao Studio City, with 1,600 rooms, 500 table games and 1,500 gaming machines, in mid-2015. Galaxy Entertainment Group will double the space at Galaxy Macau and add 1,350 rooms, up to 500 table games, and more than 1,000 gaming machines. The completion date is also set for mid-2015.
Sands China Ltd. plans to open a Paris-themed casino resort – The Parisian – in late 2015 featuring a half-scale replica of the Eiffel Tower. It will have approximately 3,000 rooms, 2,500 table slots and 450 table games. 
“They would give some new elements to Macau’s gaming and tourism industry and this can help maintain Macau’s attraction in the face of competition from neighbouring regions”, the academic says.
Mr. Craighead agrees with Mr. Siu. He expects these resorts to boost revenue growth for the respective casino operators in addition to creating a positive clustering impact on surrounding resorts. “The increase in hotel capacity and overnight patrons should be a boost to the overall market”, he maintains.
The analyst says the lack of new resorts since Sands Cotai Central’s launch in late 2012 has left the market without a significant new attraction for over two years. Cotai Central is owned by Sands China. 
“It’s also had a lack of hotel room capacity,” he adds. 
These factors should change in 2015-16. “If underlying policy towards the integrated resorts remains stable, these catalysts and others – the highway to Hong Kong Airport and Hengqin Island development – should support continued longer term growth”, he adds.
Wells Fargo forecasts a drop of four per cent same store total revenue growth in 2015, comprising 2.0 per cent same store mass and -7 per cent VIP growth. It expects two percent total market growth, when factoring in Studio City and Galaxy Macau’s second phase opening.
Mr Govertsen has a different opinion, believing that the impact of new supply is unlikely to have a material positive impact on gross gaming revenue. 
“Ultimately, the impact will be universally positive – once Macau gets through the current downturn. These new projects are reinventing the industry for a more mass market-oriented consumer with significant amounts of non-gaming attractions. This is healthy for the industry and for Macau”, he concludes.
Sterne Agee held an investors’ meeting with Melco’s co-Chairman and chief executive officer Lawrence Ho Yau Lung and chief financial officer Geoffrey Davis. They said they believe that Macau’s gross gaming revenues, with expansions, will grow next year.
‘Melco cites +8 per cent year-to-date visitation despite no new supply as demonstrative of patron demand despite the current spending environment. It believes the anti-corruption campaign is slowly giving way to the underlying desire of high-end Chinese patrons to loosen their discretionary purse strings. Melco also mentioned recent Mainland policy moves, such as the recent interest rate cut and loosening of property curbs as evidence that the Mainland may be beginning to shift its focus ‘back to business.’ It also continues to view Macau as a supply driven market – and new supply is on its way – coupled with recently extended border-crossing hours and ingress/egress infrastructure, including the permanent Cotai ferry terminal and the Hong Kong/Zhuhai/Macau bridge’, it says in a report.

Healthy decline
Mr. Siu believes a new window of opportunity may open to develop the non-gaming market more. He notes that despite the fact that gross gaming revenue is declining the number of tourists is increasing.
“This implies that tourists do not necessarily come to gamble. They might come for leisure and if this reflects the actual situation they can do some good for Macau’s non-gaming sector, and help Macau become a more diversified gaming destination”, he says.
According to his own research, non-gaming contribution in Las Vegas was 55 per cent and 30 per cent in Atlantic City, with about five per cent for Macau in 2013. “If the most developed casino markets in the U.S. are any guide, Macau really needs to work hard to increase its non-gaming sector to be a more diversified gaming destination”, he says.
According to the draft budget delivered to lawmakers last year, the government expects to collect MOP115.5 billion in direct taxes from gaming this year, a drop from the MOP117.8 billion forecast for 2014. The government took MOP120.2 billion in direct tax from gaming between January and November last year, accounting for 82.5 per cent of the government’s total revenue.
Lionel Leong Vai Tac is the new Secretary for Economy and Finance, replacing Francis Tam Pak Yuen: one of his first announcements was that he will pay particular attention to the current decline in gaming revenue.