With additional reporting by Ranajit Dam
The game is changing for casinos in Macau, the world's gambling capital, as fun-seeking middle-class Chinese visitors follow high-roller VIP gamblers in ever greater numbers to try their luck in the only place in China where casinos are legal.
The growth of the so-called premium mass segment is setting the stage for what executives hope will be a second boom in the former Portuguese colony, where a reclaimed swamp-turned casino playground known as the Cotai Strip has already been paved with gold by big-spending VIP gamblers from the mainland.
"In the next two to three years, it is going to be the next wave of the golden age of Macau," says Lawrence Ho, chief executive of Macau casino operator Melco Crown Entertainment Ltd.
The company, co-owned by Ho and Australian billionaire James Packer, said in July that net income doubled in the second quarter thanks in part to strong growth in visits from members of China's rising middle class. One of six licensed casino operators in Macau, Melco has two resorts there and is opening a new $3 billion property in mid-2015.
Melco and rivals such as U.S.-owned Sands China Ltd and Wynn Macau Ltd have traditionally made most of their profits from wealthy customers who spend more than one million yuan ($163,400) on each bet. But as demand from big whale gamblers ebbs amid China's economic slowdown, casinos are increasingly vying for the lucrative upper-middle-class market.
“A very interesting recent trend in the gaming industry in Macau has been a shift from the growing trends of the VIP segment – or ‘high rollers’ – which has slowed down, and the increase of the mass market weight in the total Macau gross gaming revenue,” says Luis Mesquita de Melo, partner at MdME Lawyers in Macao.
“The gaming VIP segment has accounted for 75 percent of Macau’s total gross gaming revenue in past years, and now accounts for around 68 percent. This, in our opinion, reflects a diversification of the gaming industry in itself which is showing signs of a slow change from a hardcore high stakes gaming industry to a more family and entertainment-friendly industry in line with the positioning of Macau as an international entertainment city that sees beyond the risks of a gaming-only based economy,” he says.
Revenue generated by Macau's mass segment is set to grow by 30 percent this year compared with around 10 percent for VIPs. In previous years, VIP growth eclipsed that of the mass segment.
Made up of newly minted customers who spend anywhere from a few thousand yuan to under one million yuan, premium mass customers generate higher margins and more stable revenue for the casinos than super-rich gamblers.
While China's economic slowdown has kept away some wealthy customers, as shown by slightly slower growth in VIP visits, it has failed to dull Macau's appeal for the country's increasingly affluent middle class.
And the trend is set to continue as China expands its high-speed train network and develops projects such as the 38 billion yuan bridge connecting Hong Kong, Macau and Zhuhai, cutting the travel time from northern China. The bridge is due for completion in 2016.
The development of Hengqin, an island 200 metres (220 yards) across the water from Macau's Cotai strip, is expected to further boost Macau's appeal as a mass-market tourist destination.
No gaming will be allowed but the mountainous island, three times the size of Macau, is gearing up to open tourist attractions including a whale and shark aquarium.
According to de Melo, there are two main measures that can help to accelerate the diversification of the Macau economy, which has been repeatedly emphasised as a priority in many political statements from high-ranking Chinese government officials. “They are, firstly, the imposition on the gaming operators of additional investment obligations on non-gaming assets and offers and, secondly, direct public investment in other activities such as the MICE (meetings, incentives, conferencing, exhibitions) industry, creative industries, cultural and sports events and so on,” he says. “These can attract a different type of tourist (that is, those not focused exclusively on gambling) and extend their length of stay in Macau.”
Critical mass
The Chinese government, which is keen for Macau to diversify its heavy reliance on gambling income, is pushing to attract more leisure tourists to boost the city's profile as an international tourist destination.
Macau gets more than 70 percent of its tax revenue from casinos and tourists come primarily to gamble, as opposed to Las Vegas where entertainment and restaurants contribute the bulk of revenue.
Evidence that Macau is trying to accelerate the shift to mass gamblers is the rapid expansion of the Las Vegas-style Cotai Strip with six large-scale casino resorts, including hotels and restaurants, expected to open in the next three years.
The building boom has an added urgency with the casino licences set to expire starting in 2020. Industry watchers are concerned that the discussions for licence renewals, expected to start in 2015, could increase regulations and costs.
“Although we don't believe that, based on what we know today, any of the current gaming concessions and/or sub-concessions may be at risk of non-renewal. The fact is that the renegotiation process will eventually open a window of opportunity for the Macau government to impose additional investment obligations to the gaming operators on non-gaming sectors of the economy,” says de Melo. “Also, depending on how the new emerging gaming jurisdictions like the Philippines, Singapore, Vietnam, Cambodia (and in the future, Taiwan and Japan), will compete with the gaming market in Macau, the government will either increase the Special Gaming Tax in order to retain more gaming revenue and to prevent the transfer of gaming profits to other jurisdictions, or decrease it in order to render the Macau gaming market more competitive in relation to the other gaming jurisdictions around Asia.”
According to de Melo, the renewal process might also allow the government the opportunity to open the Macau gaming market to other key industry players who have showed a long-standing interest in investing in Macau, further control the gaming industry's growth by imposing contractual restrictions on the gaming operators and enact legislation reviewing different aspects of the Macau gaming regime proved to have weak teeth and many loopholes. “We sincerely hope that the government and the regulator do not remain tight-lipped on these issues and that well before 2020 – it could be 2015 as recently reported by the press – we can see the legal path for business continuity being implemented with transparency and clear rules,” he adds.
Melco's new project, Studio City, will include non-gaming elements to lure a broader spectrum of travelers. Studio City will be joined by properties including Sands chief Sheldon Adelson's Parisian, boasting a miniature Eiffel Tower, and Steve Wynn's floral-themed resort featuring an artificial lake and dancing fountains like the Bellagio in Las Vegas.
But with Macau's gaming revenue growth expected to be between 13 percent and 15 percent this year compared with up to 60 percent at its peak, casino operators are hedging their bets with resorts elsewhere in Asia.
Melco is building a casino in the Philippines with one of the country's wealthiest men, Henry Sy. Ho is also building a casino resort in Vladivostok, on Russia's east coast not far from the Chinese border.
Adelson opened the huge Marina Bay Sands integrated casino resort in Singapore in 2011, and is among several operators keen to expand in Japan pending government legislation to legalise casinos.
The near future
The next three to five years will see five major integrated resorts opening in the Cotai area in addition to the considerable extension of an existing one. “They will all have a gaming component associated with non-gaming facilities and other hospitality and entertainment features,” says de Melo. “This represents an investment, in very rough figures, of around 18 to 20 billion U.S. dollars. The multiplying effect of these investments in the Macau economy will be very significant and, therefore, we believe that not only the gaming market in Macau but the economy in general will keep maturing with strong growth indicators and many investment opportunities.”
“We also think that the composition of the gaming gross revenue will see an increase of the mass market proportion. The gaming promoters, commonly known as ‘junkets,’ will continue to pursue funding opportunities through the access to capital markets in order to access liquidity to be able to provide credit for gaming to their clients; there will be more investment funds and other financial institutions looking into investment opportunities in the Macau gaming market,” he adds.
“Considering that the gaming industry is the ‘bread and butter’ of Macau, the outcome of the renegotiation of the gaming concessions and sub-concessions will represent a decisive moment in the future of Macau’s economy, but at this point, it is nothing more than a big question mark,” says de Melo.
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