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IN-DEPTH 30 May 2018
Macau back on top

Managing Partner at IGamiX Management & Consulting Ltd, Ben Lee, is widely acknowledged as a leading expert on Asian gaming, particularly in the VIP market segment. Here he gives his insight into Macau’s journey rising from the ashes in 2017

By Gambling Insider
With Vegas still struggling to get the local denizens to leave some money at the table, Singapore getting lots of visitors as well but not high rollers, and an Australian casino trying to get its people out of jail, 2017 was nothing but an interesting year.

Macau certainly has been on a tear, finishing the year with a fantastic 19%year-on-year growth in gaming revenue, driven mainly by the VIP segment no less. This is a segment that had long been written off by most western gaming analysts, who still struggle to understand the Asian socio-economic dynamics and the underlying Chinese gambling culture sub-text after all these years, trying constantly to frame the market in a western-style middle class mass context. Despite evidence that is right before their eyes, indicating that the resurgence was very much VIP-centric, some chose to ignore it and called the recovery mass driven before diluting the rhetoric to mass anchored, and finally admitting that it is VIP led. This has in turn led to headlines such as ‘Recovery in Macau VIP surprises investors’ and investors ploughing their funds into the wrong stocks.

With non-stop monthly year-on-year growth starting in August 2016, triggered initially by the opening of Wynn Palace after a dearth of new properties, Macau’s growth was fueled by returning VIP players, who were ‘encouraged to come back' from other gaming jurisdictions by the undercover Chinese agents who followed them. Crown Resorts Casino in Australia managed to have its marketing offices in China shut down and all its local, and some visiting senior executives arrested, and that in turn was another message to foreign casinos who have long targeted that market. On top of that, China issued an edict last year that it would not permit its nationals or companies to be involved in setting up new gaming projects anywhere; put this together and you get a tidy big picture that suggests that China realised that if they squeeze Macau, the players and their money will simply go somewhere else, and that it is better for them to return to lose their money in Macau where it is still within the ‘family’. How else can one explain why there has been no reaction from Beijing to-date on the strong continuous growth that we have been seeing over the past sixteen months?

How does one explain the Macau gaming market fundamentals? Take the two broad segments; the mass market and VIPs. With mass market players, be they grind or premium, the players come to Macau with their cash (which incidentally is being increasingly constrained through continuous clampdowns on UnionPay channels), lose their money and leave.

Many gaming analysts have predicted that Macau’s gaming recovery as well as long-term growth prospects hinge on the mass market. But what is the mass market in Macau? For starters, Macau doesn’t have a home-grown domestic mass market, with a local population of only 450,000. We rely on the regional, but more importantly on mainland Chinese, for the bulk of our visitors. Unlike a typical casino mass market in say Singapore, Australia or even the USA, each and every one of these visitors are international visitors constrained by visa rules, forex restrictions, cost of and access to travel as well as accommodation logistics.

The VIPs on the other hand, come over, lose their funds (which is thousands of times that of the mass player), gets given credit to keep on playing, and should they lose again, they may obtain even more credit from the junket operator. Whenever there is a recovery, the VIP segment has always recovered much quicker than mass, all because the secret ingredient has been both the volume of play, but more importantly the use of credit as an additional volume multiplier. The third factor behind the VIP drive has to do with the junket operators themselves. With no amortisation and depreciation of assets, nor debt leverage to worry about, any profit the junket operators make is usually ploughed back into the liquidity of the business, which in turn amplifies the upswing.

The South Korean and Singapore markets are both clear examples of a gaming industry visited by the grind Chinese mass, without the VIPs facilitated by junkets. Prior to the drastic downturn triggered by the THAAD missile crisis, South Korea’s Gross Gaming Revenue already pointed to some interesting trends. Chinese visitors to the casinos in 2014 rose 34% year-on-year, however the casino revenues reported over the same period was flat, at -0.1% year-on-year.

Similarly in Singapore, the 2016 casino revenue from the two Integrated Resorts fell 60.5%, while the number of  inbound tourism and tourism receipts from mainland Chinese grew at 36% and 41% year-on-year respectively. What these two markets share is that they are predominantly mass oriented, and popularly visited by mainland Chinese. Throw in myriad Chinese outbound travelers surveys and the trend is one of increasing sophistication and preference for new experiences similar to the boom in Japanese outbound tourism a decade ago. The picture is clearly one where the market is evolving, and that jaded replicas of other tourism destinations is no longer a draw, when the target market is flying directly to those ‘real’ destinations and beyond, into the little provincial towns and off beaten tracks.

Port that picture back to Macau, and it is obvious that there is something else in play in the so-called mass market.

Essentially, the mass market consists of a significant proportion of ‘premium mass’ where players would come to Macau for the weekend and drop anywhere between US$10,000 to $70,000 and even beyond. The players who represent this premium mass segment are clearly not mass, and are in effect VIP players who have migrated downwards from the VIP rooms. They do so primarily to avoid being identified as regular VIP players in Macau, a pattern that emerged during the anti-corruption and anti-ostentation campaigns. There are also other factors that came into play which is mainly the failure of Macau to diversify its economy, which lead to a new government rhetoric of diversification of gaming from VIP to mass, a politically correct mantra that was quickly adopted by the casino operators, which in turn was swallowed by some, but not all, gaming analysts. Even now, we read notes that the future of Macau’s gaming industry lies with the mass and non-gaming.

Yes, perhaps eventually, that may happen, however a whole horde of current environmental factors together form a formidable roadblock to that vision. For starters, Macau with its tiny local population does not have the human resources to facilitate any significant improvements in local logistics, support industries and infrastructure requirements, yet at the same time, the jurisdiction maintains a chokehold on the importation of skilled labour from outside of Macau. The local residents have also previously railed against the enduring regular influxes of Chinese visitors, and in April 2014 after a series of local protests, the Macau Government had to request that China cap its visitors at 21 million. The result was a magic 20.4 million Chinese visitations in 2015 and 2016, and it was only in the final month of December 2017 that we saw a relaxation of that cap, which saw Chinese visitors breach the 21 million cap to reach 21.7 million.

Projecting all this to 2018, and what we see is a continuing resurgence in Macau’s gaming industry, which will continue to be driven by the VIPs. The constant drip flow of crackdown on the underground channels as well as UnionPay will serve to depress the mass and premium mass market, and encourage the premium players back into the fold of the junket operators.

The looming expiration of the concessions in Macau in 2020-22 will continue to attract attention and much speculation, with the western investors seemingly impervious to the potential risks of the foreign concession holders losing their concessions. Never mind that the original vision was one foreign concession to two locals, which somehow turned into a 3:3 situation; the intransigence and indifference of some to their hosts; and the fact that despite continuous reminders to invest in non-gaming, some have failed to do so. Include the fact that the concessions will be awarded in a totally new bidding process, which in turn means that should any of the operators fail to put their best foot forward, they could in fact fail to make the top bids and could lose out, seem not to have penetrated the consciousness of some investors.

The narrative that the Macau Government would likely extend the first two expiring concessions to align with the other two in 2022, appears to jar with the recent timetable announced by the Chief Executive, which will see a new concession template to be announced by the middle of this year. This new timeline could well see the necessary public consultations be held in the second half of the year and the bidding process held in 2019, with the new concessions to be announced just in time for the first concessions in 2020.

Macau in 2018 will continue to surprise most, specifically the ones who fail to cut out the story tellers and do not go direct to the local sources for their information.

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