HONG KONG - When Macau's casino revenue
growth falls out of the stratosphere, investors
look for scapegoats. With the global gaming
capital's dependence on mainland China, the hunt
doesn't have to go very far.
The present
economic slowdown in China's economic growth seems
to dictate slower growth in Macau's gaming
revenue. But the equation may not be that simple,
even though solutions may to have to come from the
mainland economy. This pause in growth, coinciding
with a pause in new casino openings, presents
Macau with an opportunity to assess its options.
There's no doubt that Macau is the midst
of its first slowdown in growth since the dark
days of 2008-09, when Beijing cut back on
granting visas for
mainland visitors to Macau and also barred them
from traveling to Macau on visas issued for Hong
Kong.
In May, gross gaming revenue (GGR)
at Macau's casinos grew 7.3% from a year earlier,
the lowest year-on-year expansion for any month
since July 2009. For all of last year, GGR grew
42.2% to 267.9 billion patacas (US$33.5 billion).
The growth rate slowed in the final two months of
2011 and was trending at 25.7% for the first four
months of this year.
Look on the bright
side For Macau bulls, May numbers weren't
quite as grim as they seemed. Despite the low
growth, May's 26.1 billion patacas GGR represents
the second-highest monthly highest GGR yet. Wells
Fargo Bank analyst Cameron McKnight noted that
casinos had a very lucky month in May 2011. With a
normal winning rate for comparison rather the
inflated figure, McKnight estimated May growth
this year would have been 14%.
Growth came
in 12.2% for June, customarily a slow month
following the week-long Labor Day holiday in May.
Trends for July show growth of less than 5%. These
growth rates, still in double-digits for the year
overall, would be mouthwatering numbers for
virtually any other casino jurisdiction in the
world, but they're a huge comedown for Macau.
The obvious culprit in Macau's slowdown is
the mainland China economy. Some 60% of Macau's
visitors, and 90% of the so-called VIP high-roller
bets that dominate its casino revenue, originate
in the mainland. As China's growth slows, due to
both internal factors and lagging demand from key
export markets in Europe and the United States,
Macau GGR seems destined to follow.
Several factors also contribute to the
slowdown. Galaxy Macau, which opened in mid-May
last year, proved to be a huge hit, so the
year-ago numbers set the bar high for year-on-year
comparisons. This year's revenue hasn't had a
similar boost from the opening of Sands Cotai
Central casino resort, which includes a
well-designed but limited shopping mall, the
world's largest Holiday Inn and Conrad Hotel
outlets.the world's largest Sheraton will open
there later this year.
Where's the
wow? "The recent opening of Sands Cotai
Central did not have a major impact on gaming
revenues and visitor volume, unlike the openings
of the Venetian Macao [in 2007] and Galaxy Macau,"
Gaming Marketing Advisors principal Andrew
Klebanow said. "This is not so much a reflection
on macroeconomic factors as the fact that Cotai
Central was not particularly spectacular. It is
nice, but it is not a must-see attraction. It
added to the overall room supply and some
additional tables, but it did not wow the market."
Politics may also play a part in Macau's
slowdown, according to Grant Govertsen, Union
Gaming Group managing partner there.
"The
Macau market could still grow nicely even through
an economic downturn in the mainland. I believe
that part of the reason we're seeing a slowdown in
VIP isn't just because of difficult year-over-year
comparisons, or because of a slowing economy in
China.
"Instead, I think part of the VIP
slowdown might be attributable to the upcoming
leadership change in Beijing, which could result
in VIP players staying on the sidelines and not
wanting to draw attention to themselves in Macau -
until such time as they know who will be running
the show next year."
Whatever the reasons
behind this year's disappointing results, both
experts believe the correlation between China's
economy and Macau's revenue will strengthen.
"The link between Macau and the mainland
economy should, indeed, become closer over time,
and especially as Macau matures as a market,"
Govertsen said. "In a scenario where Chinese
residents have perfect access to Macau - similar
to how US residents generally have great access to
Vegas - then fluctuations of the Chinese economy
are more likely to be felt here."
Klebanow
said, "Given the proximity of mainland China to
Macau and the fact that Macau continues to be a
regional gaming destination serving the markets of
the Pearl River Delta, Macau's gaming revenue
performance will continue to mirror, to some
degree, the region's economy. The health of the
mainland's economy and Macau gaming revenue
performance have been and will continue to be
intertwined."
Riding the
tiger So as Macau gets bigger, it will more
vulnerable to the ups and downs of the Chinese
economy. Whether that's a good thing or not
depends on your view of how soon and for how long
the mainland economy will resume its gravity
defying growth.
Macau's government, backed
by Beijing, strongly pursues closer economic
cooperation with the mainland, especially
neighboring Guangdong province, which also happens
to be Macau's leading source of visitors. But the
government, echoing Beijing, also supports
economic diversification. However, Macau's
definition of that term remains as difficult to
nail down as Jell-O.
Sometimes economic
diversification means widening Macau's tourism
net, to attract more visitors from beyond greater
China. Sometimes it means broadening the economic
base to new business fields, such as
government-supported initiatives to foster
creative industries and Chinese traditional
medicine. Sometimes it means expanding the menu of
hospitality offerings. However it's defined,
diversification is fraught with difficulties.
"Sheldon Adelson [founder of Sands China's
parent company Las Vegas Sands] had long
envisioned Cotai being a regional convention and
meeting center serving the countries of Asia, much
like Las Vegas, which serves the US market," said
Klebanow, who advises clients in the US, Asia and
beyond.
"Unfortunately, other than the
Venetian Macao convention center there is not a
lot of meeting and exhibition space going up, at
least not enough to transform Macau from a gaming
entertainment center to a convention and meeting
center. Then there is the issue of getting to
Macau from Hong Kong. Despite the ferry service
from the airport, it remains a hassle."
Broadening the base Govertsen
said, "In my opinion, the one thing that will
broaden the customer base the most will be the
various infrastructure projects that will make it
easier to come to Macau.
"Secondarily, the
development of various non-gaming amenities should
also help diversify the customer base - see the
IRs [integrated resorts] in Singapore. However,
that would also assume a large behavioral change
on the part of Chinese customers, who aren't
currently coming to Macau for much other than for
casino gaming. "
Rather than changing the
behavior of the current visitors, diversification
could also mean attracting a greater range of
visitors from within mainland China. There are
already signs of that in the gaming figures, which
show that mass market play is growing at more than
20% while VIP revenue stagnates. That's a welcome
trend for casino operators, since mass market play
has higher margins, but some seem to have missed
the memo.
"With respect to which casino
operators are already doing things to diversify
the customer base, the only players so far that
fit that bill are the operators who have already
opened properties on Cotai, namely Sands China,
Melco Crown [operating City of Dreams) and Galaxy
Entertainment," Govertsen said. "Over time the
other three operators will get there as well,
albeit another four years from now - or more."
Even so, while casino operators have the
will to extend their reach, that reach is limited,
Klebanow said. "In the end I think casino
operators will have to develop properties in other
jurisdictions [to reach markets beyond China],
while Macau grows primarily as a regional gaming
destination serving the Chinese mainland. And that
is not necessarily a bad thing. China is a very
big market and one that has not yet reached
maturity."
In other words, if you have to
put all of your eggs in one basket, China is
probably the best one to use. Just don't panic
whenever there's a hiccup.
Macau
Business special correspondent and former
broadcast news producer Muhammad Cohen told
America's story to the world as a US diplomat and
is author of Hong
Kong On Air, a novel set during the 1997
handover about television news, love, betrayal,
high finance, and cheap lingerie. Find his blog,
online archive and more at www.MuhammadCohen.com,
and follow him on Facebook
and Twitter @MuhammadCohen.
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, a novel set during the 1997
handover about television news, love, betrayal,
high finance, and cheap lingerie. Find his blog,
online archive and more at 
