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February 8, 2013 9:29 am
An exhibition of 12 gold bricks, each about 2.5 metres high, opened on Thursday in the courtyard of the MGM Macau.
It is hard not to see the exhibition as a metaphor for what the city must represent for the six owners of its casinos, who include Las Vegas billionaires Steve Wynn and Sheldon Adelson, and the family of veteran magnate Stanley Ho.
They dominate a gaming market that brings in annual receipts of US$38bn and pretty much exclusively serves China’s gambling-obsessed rich and middle class. The chief executive of a large Hong Kong trading company recently confessed to being astounded that Wynn Resorts’ only building in Macau generates US$1bn in annual earnings before interest, taxes and depreciation.
Contrary to Steve Wynn’s comment in a call to analysts this month that competition in Macau is “murder-tough”, business has arguably never looked better. With just six competitors, gaming companies in Macau are a better bet than luxury goods companies or department stores on the rising consumption of China’s rich and middle class, argues Aaron Fischer, an analyst with CLSA.
And the mix of revenue appears to be getting better: In 2012, the growth of the VIP segment rose only 7 per cent to 210bn patacas (US$26bn) while the mass market, where margins are healthier for the casino operators, grew 33 per cent to 80bn patacas.
This is good news because the mass market provides well over half of the Macau industry’s ebitda, while VIP contributes about a third with a tiny portion coming from non-gaming, mostly the rental payments from retail stores on these properties. This may seem counter-intuitive but as Credit Suisse analyst Gabriel Chan observes, in Macau, “forget about this (glamorous) image of the VIP high-roller. The VIP in Macau is not really a customer. He is the customer of the junket.”
Of a casino’s typical win rate of HK$2.85 of every HK$100 spent at the tables, it must give $1.25 away as the junket’s commission on VIP gamblers – or more than the share it pays the government of Macau in taxes.
Moreover, the demand from VIP gamblers is also seen as volatile and vulnerable to the tightening of credit in China and the country’s periodic crackdowns on corruption. A news report suggesting that Chinese law enforcement officials were planning a crackdown on junket operators who extend credit to the high rollers as part of the new Chinese leadership’s attempts to rein in corruption sent Macau stocks down about 5 per cent on Wednesday.
One of Macau’s persistent handicaps that has impeded the growth of the mass gaming sector has been a shortage of hotel rooms, which drove tariffs to more than US$200 a night and meant that many travellers were day-trippers.
However, new openings on the Cotai strip last year by Sands China added 4,000 hotel rooms and, in the past fortnight, the opening of a second tower of 2,000 rooms at Sands China’s Sheraton has further eased the shortage, but Macau still has 28,000 hotel rooms compared with Hong Kong’s 74,000.
Sands China said it had received permission from the Macau government for 200 additional gambling tables, taking the total tables allowed by the government to the industry as a whole to about 5,750.
The Macau government has added tables incrementally so that it can control the pace of development of this booming business. That cap on the number of tables coupled with the recent phenomenon of an increasing number of Chinese gamblers who travel independently to the casinos but bet HK$2,000-HK$3,000 (US$258-US$390) per hand of baccarat has led to the creation of a “premium mass” customer within the mass gaming segment.
Aaron Fischer, an analyst with CLSA, says he was surprised a week ago when he walked on to the gaming floor of Melco Crown’s City of Dreams. “I only saw tables with minimum bets of HK$1,000, HK $2,000 and HK$5,000. The shortage of tables is driving up the price of gambling,” says Mr Fischer. Gamblers who bet HK$2,000 to HK$3,000 per hand of baccarat are defined as premium mass.
At Sands China, favoured by most analysts because its business is overwhelmingly drawn from the mass market, the company has created Fast Action Baccarat, which features 20-30 players at a table betting as little as HK$100-HK$200 per hand with one dealer presiding. The game was introduced just a few weeks ago but on an afternoon earlier this week it was the busiest part of the casino. Indeed, each table is generating total bets of US$10,000 per day, reports Edward Tracy, chief executive. “There is no underestimating the Chinese market when it comes to gambling,” he says.
Inevitably, there are sceptics. Gary Pinge, analyst with Macquarie, questions whether people able to afford a bet of HK$1,000-$2,000 per hand are really part of the premium mass market. Their “fortunes may be more tied to the VIP segment”.
If “premium mass” turns out to be as volatile as the VIP segment, Macau’s gleaming fundamentals, like those of the giant bricks at MGM Macau, may prove to have only a veneer of gold, but the sceptics thus far have been proven wrong.
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