MACAU - Just in time for
China's Golden Week holiday, Sands China opened
phase two of its Sands Cotai Central here late
last month. Mainland tourists visiting to
celebrate the 63rd anniversary of Mao Zedong's
declaration of the People's Republic of China, or
any other occasion, can now select the world's
largest Sheraton hotel, alongside the world's
largest Conrad and Holiday Inn that debuted during
the initial opening of Sands Cotai Central (SCC)
in April.
Results have so far been solid,
but by Macau standards underwhelming, for the $4.4
billion resort. There have been complaints that
SCC lacks a must-see attraction (see Macau
misses wow factor, Asia Times Online, July 26,
2012). Company
officials express
confidence in the property, noting that it won't
be fully completed until next year.
Perhaps the biggest problem facing Sands
Cotai Central is that it opened during a rare
rough patch in Macau's otherwise soaring economic
trajectory since the end of Stanley Ho's casino
monopoly a decade ago. Gaming industry expansion
has made Macau the fastest-growing region of China
over those 10 years. Following 58% growth in 2010,
casino revenue grew a staggering 42% last year to
268 billion Macau patacas (US$33.5 billion).
That's more than five times the total for the Las
Vegas Strip, and a bigger sum than the top 20 US
casino markets combined.
This year began
with 35% gross gaming revenue (GGR) growth in
January, but expansion has decelerated since,
particularly since SCC's April debut. Tourist
arrivals have also been falling, although they
perked up during Golden Week. In September, the
government reported GGR of 23.9 billion patacas,
up 12.3% from a year ago. That was well below
analysts' consensus forecast of 17%, and according
to Well Fargo analyst Cameron McKnight growth
would have been 7.4% if casinos had not been
disproportionately lucky. Whatever the reason, the
figure was welcome after 1.5% GGR growth in July
and 5.5% in August. Casino revenue growth for the
first nine months of this year has fallen to
14.9%.
History repeats Months of
single-digit growth and below-consensus results
hearken back to the dark days of 2009 that greeted
the opening of Melco Crown's City of Dreams
resort, SCC's neighbor on the east side of Cotai's
central boulevard. Maybe it's something about the
feng shui on that side of the street,
opposite the Sands China's flagship Venetian
Macao.
In 2009, restrictions on visas for
mainland visitors combined with a severe recession
in the West that cut China's exports hit casinos
hard. Macau registered gaming revenue growth for
the full year of 9.9%, with a handful of months
showing less revenue than the previous year.
This time, the villain in Macau's slowdown
is decelerating growth in China. A recent study by
HSBC gaming analyst Sean Monaghan shows Macau's
VIP revenue, the take from high rollers that
represents more than two-thirds of Macau's total,
closely tracks China's GDP growth. So this year's
VIP slump has been predictable. That doesn't make
it any less substantial or painful for the casino
operators and the Macau economy, where GDP growth
made a rare dip into single digits in the second
quarter, and will likely do so again when third
quarter numbers are released.
Mass
movement Things this time aren't as bleak
as in 2009. While VIP revenue stagnates, mass
market gaming revenue is booming, growing at 30%
or better despite the slowdown. Mass market play
is four times as profitable as VIP play because
casinos don't have to pay commissions to junket
operators, middlemen who deliver high rollers to
the tables.
Galaxy Entertainment Group
chief financial officer Robert Drake notes that
even with a mix of 70% VIP and 30% mass gaming
revenue, the two segments contribute equally to
profits. "We believe the VIP will always be an
important component of Macau, but the mass market
will become increasingly important with time,"
Drake says.
Several other changes since
2009 point to mass market visitors rather than
VIPs driving Macau's growth in the years ahead. To
assuage Beijing's concerns about the uncontrolled
growth of the gambling industry, Macau agreed to
take steps to limit its expansion. The government
slowed the approval process for new casino resorts
to a crawl, approving only Wynn Macau's
application to build in Cotai since then. Last
month, officials said they are unlikely to fulfill
a promise to approve one more Cotai resort
application this year. Even previously approved
projects are facing delays for permission to begin
construction.
Let us entertain
you Beijing's directive that Macau become
an entertainment and leisure center under the
latest five-year plan gave new impetus to
longstanding demands for economic diversification.
New projects have to include better balance of
other activities to go along with casinos, an
attempt to make Macau a more attractive vacation
destination.
"Mass market growth required
the support of more non-gaming facilities,"
University of Macau gaming expert Ricardo Siu
says. "That was the model in Las Vegas." Las Vegas
today gets more than half of its revenue from
hotels, fine dining, shows and other non-gaming
attractions, while Macau casino resorts still get
nearly 90% of their revenue from gaming.
In turn, growth of Macau's mass market is
helping those new attractions find an audience.
"The rise of the mass market has stimulated the
demand for more diverse and innovative
entertainment, other than gaming, for the young
generation and families to attract their visits
and longer stays," a spokesperson for Melco Crown
Entertainment says. Its City of Dreams complex
includes the US$250 million House of Dancing
Waters stage spectacle; Club Cubic one of Macau's
most popular nightclubs relocated from the
peninsula; and Dragon's Treasure, a free
multimedia show.
Reinforcing the edict to
diversify, the government has imposed a limit of
5,500 casino tables until next year. Since the
limit was announced in 2010, casinos have
pretended it didn't really matter, telling
investors they'd been assured certain table
allotments by unidentified government officials.
But with Macau table counts hitting the ceiling,
SCC wasn't permitted to open new tables for its
second casino last month, and had to shift them
from other Sands China properties.
New
deal These new conditions have shuffled the
deck for Macau casino operators.
"Clearly
the properties with large numbers of hotel rooms
are best positioned to service the mass market.
These include all of the resorts on Cotai as well
as the newer properties in downtown Macau," Gaming
Market Advisors principal Andrew Klebanow says.
"Casinos make money from mass market players by
first filling up their hotel rooms. Once those
hotel rooms are full, they can then focus their
attention on getting those guests into the casino.
Heads in beds leads to bodies in the casino. The
more rooms a casino has, the more heads it can
place in their rooms, and the more bodies they can
drive into their casinos."
"The mass
market is very important to Sands China, So it's
no accident that Sands Cotai Central chose the
hotel partners it did with Conrad, Sheraton and
Holiday Inn," Sands China president and chief
executive officer Edward Tracy said. "The
diversity of accommodation choices represented by
those three internationally celebrated brands
covers a wide spectrum of consumers."
HSBC's Sean Monaghan writes in his report
on Macau, "Companies such as Sands China have the
largest portion of revenue derived from mass
gaming, and as such, are better positioned, in our
view, to experience upside potential from the
market recovery."
Sands China's Tracy
notes, "When all development phases of Sands Cotai
Central are complete in early 2013, the combined
Sands China portfolio of properties will feature
over 9,000 hotel rooms and suites, 1.3 million
square feet [120,774 square meters] of meetings
and convention space, more than 90 different
dining options, over 600 luxury and mid-market
retail shops and 920,000 square feet of gaming
space."
For now, that puts Sands China far
ahead of its rivals in those categories, but
they're all trying to catch up. Melco Crown is
building cinema-themed Macau Studio City next to
the Lotus Bridge border crossing into Cotai from
Guangdong province and adding another hotel tower
to City of Dreams. Wynn Macau won approval in May
for a $4 billion, 2,000 room Cotai resort. Galaxy
Macau's second phase will add 1,300 rooms under
two international hotel brands, as well as shops
and gardens around its famed rooftop wave pool.
Sands China hopes to break ground his year on its
$3 billion Parisian resort, south of the Venetian,
with 3,000 rooms. MGM China and market leader
Sociedade de Jogos de Macau (SJM) are awaiting
approval to build resorts in Cotai.
"With
Macau's stated goal of becoming one of the world's
top tourism destinations the only way the market
can get there is by creating attractions that have
a mass appeal," Union Gaming Group Macau-based
analyst Grant Govertsen says. "I think it will
take a long time to get there, but the next wave
of casino-resort development on Cotai should begin
to set the tone."
That wave has lapped the
shore with the opening of Sands Cotai Central.
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 
