Hengqin - Game changer for Macau?

Hengqin, an island 200 meters from Macau, yet three times its size, is being touted as a game-changer for the world’s biggest gambling hub and a catalyst for the future growth of its casino industry.

 

It is part of mainland China’s Zhuhai City and gambling is banned there, but the island is expected to drive the next phase of development in Macau, boosting supply and therefore reducing costs and diversifying the territory away from a pure gambling play.

 

“When I speak with international investors who express regret for not investing in Cotai ten years ago when they had the opportunity, I tell them they still can: it’s called Hengqin,” said Matthew Ossolinski, CEO of GW Investment Consulting. The investment consultancy is specialized in introducing foreign investors to development opportunities in Hengqin.

 

While in a speech at the University of Macau last September, Stephen Wynn, chairman of Wynn Macau predicted that Hengqin and Macau would become one of the most powerful tourism destinations in the world by 2020.

 

The Beijing government approved an overall development plan for Hengqin in 2009, while in 2011 the State Council gave the green light to policies setting up the special economic zone.

 

In less than three years, the Hengqin New Area has attracted investments to the extent of RMB120 billion. Of the 23 major projects, 16 are already underway.

 

The most immediate impact  on Macau is that the island offers an alternative and more economic option for accommodation, which will enable Macau to host more tourists, in particular from the more profitable mass market segment. The border is now open 24 hours a day allowing easy passage into Cotai.

 

In 2013, while Las Vegas had 150,593 rooms to host a total of 39,668,221 visitors, Macau only had 23,423 rooms for 29,324,822 visitors. About 31.7 million people, or about 12.5 percent of the US population, travelled to Las Vegas, compared with 18.6 million Chinese visitors to Macau, or just over 1 percent of the total population, indicating the potential for growth given the right conditions.

 

“We refer to Hengqin as Cotai Phase 3. Macau has a shortage of hotel rooms. Hotels on Hengqin will provide thousands of additional rooms. Many visitors will come for a well-rounded Cotai and Hengqin integrated entertainment experience,” Ossolinki said.

 

While Wynn has estimated that another 15,000 rooms will be built in Macau and Hengqin in the next 2 or 3 years, Andrew M. Klebanow, Partner of Global Market Advisors was more circumspect about the potential investment levels.

 

“It remains to be seen what will ultimately be developed on Hengqin,  It is safe to say that the ultimate number of rooms will not approach those on Cotai.”

 

“The customer mix will be dramatically different than Cotai. Cotai is and will remain a gaming-centric destination, supplemented by MICE lodging demand,” he added.

 

Despite the current downturn in gambling revenue, Ossolinski remains upbeat, with new supply seen driving demand.  

 

“The Asian consumer’s appetite for gambling will be at its highest point ever—and growing,” he said, referring to his expectations for 2020. “Even if other gambling jurisdictions open in Greater China, the market will remain supply-driven—still decades away from ‘saturation point’. The demand will far exceed the supply for many, many years.”

“It will be the Golden Age of Gaming in Asia. Comparisons with Las Vegas Strip revenue numbers will be obsolete,” he adds.

 

However, Hengqin’s impact on Macau extends beyond the number of new hotel rooms. As gambling is not allowed in Hengqin, the resorts in the island will focus on non-gaming, family entertainment and ecotourism, appealing to Macau’s rapidly growing mass-market sector, as well as satisfying the government’s push to diversify the economy.

 

According to UBS’s 2015 Macau Outlook, gross gaming revenue growth in the VIP market will drop 11 percent in 2015 and gradually increase from 6 percent in 2016 to a slowdown in growth at 5 percent in 2018. Meanwhile, the mass market shows more potential for growth from a 4 percent increase in 2015 to a 13 percent increase in 2018.

 

Ossolinski noted that Macau is “gradually transforming into a Las Vegas-type model” and “Hengqin will be a turning point” adding hotel rooms, convention space, theme parks, resorts, and other family entertainment to Cotai’s offering.

 

Cotai itself already boasts more than 120,000 square metres of MICE space for conventions and meetings facilities and Hengqin will take Macau’s capacity as a center for conventions to the next level.            

                                                                   

“Hengqin will also be critical to achieving greater diversification of Macau’s economy. For example, to become the MICE hub for China, Macau would need more land for large-scale convention centers and hotel rooms. Hengqin has the land and the rooms for convention space,” Ossolinski added.

 

The Chimelong International Ocean Resort, the first resort in Hengqin is a prime example. The resort was opened January 18th last year and attracted 500,000 visitors from the following 28 January to 6 February. Chen Wancheng, president of Guangdong Chimelong Group unveiled the company’s plan to build five theme parks, including the existing Ocean Kingdom, and more than 20,000 hotel rooms at the Chinese Mainland-Hong Kong-Taiwan Aquarium Development Forum, which took place last October.

 

Some of Macau’s gaming concessionaires have confirmed their investment interest in Hengqin. Galaxy Entertainment, for example, has entered into a framework agreement for a 2.7 square kilometer land parcel to build a low-rise and low-density resort, including approximately 2.5 kilometers of waterfront coastline in Hengqin, according to the company’s most recent interim report. MGM China also announced its investment interest in Hengqin last December.

 

According to PricewaterhouseCoopers, Hengqin offers both tax and financial incentives for individuals and qualified companies. For instance, qualified Hong Kong and Macau residents are entitled rebates if the individual income tax exceeds the hypothetical individual tax in their original city. Qualified companies may enjoy a reduced corporate income tax rate of 15 percent, 10 percent less than the standard rate of 25 percent.

 

Ossolinski revealed that most of Macau’s casino operators will have non-gaming projects in Hengqin but he did not disclose further details. He also mentioned that several international entities are in advanced talks on Hengqin deals and his company has worked with businesses from the US, Germany, and Dubai who are interested in pursuing investment opportunities on the  island.

 

Projects in Hengqin will not be confined to leisure and tourism only; they also cover finance, creative industries, Chinese medicine, R&D and hi-tech, according to the Hengqin New District Management Administration (HNDMA).

 

According to Jay Chun, chairman of LT Game and head of the Macau Gaming Manufacturers’ Association, Hengqin is also beneficial to Macau’s gaming suppliers sector. His company LT Game, for example, is planning to set up a software-focused research and development facility on the island. 

 

Hengqin will also add more supply to Macau’s residential property market and serve as a release valve for Macau residents seeking more residential property options, according to Ossolinski.

 

Niu Jing, director of HNDMA. Niu has predicted that one third of the 200,000 inhabitants in Hengqin will be residents of Macau by 2020. That also implies that Hengqin will be closely linked to Macau’s property market and prices on the island are likely to soar.

 

Hengqin’s connections to Macau and other cities in Guangdong province will also provide further opportunities for growth.

 

For example, there will be a highway to connect Hengqin to the Hong Kong-Zhuhai-Macau Bridge. The bridge, which is expected to open by 2016, will reduce the journey time between Hong Kong and Macau from the current 1 hour and 5 minute ferry ride to less than 30 minutes by car.

 

Drivers with Macau number plates will be able to enter Hengqin freely but they will need a Guangdong province licence plate should they want to cross the bridge.

 

Other infrastructure projects include a new rail line to be built that will link Hengqin with the national high-speed rail network and Zhuhai airport. Currently Hengqin is not directly served by any airport, but will have three when these infrastructure projects are completed.

 

Ossolinski commented: “Transportation infrastructure will change everything. Everything. Macau will be easily accessible and fully connected to the region’s other cities. The Pearl River Delta will be the largest megalopolis the world has ever seen.”

 

Nobody has a crystal ball to predict the future, but Macau’s proven track record of overtaking Las Vegas as the world’s biggest gambling hub may offer a good reason to stay positive.

 

Ossolinski said: “Macau will always have a certain advantage: It is in China. Once Cotai is built out further, in the eyes of consumers it will be a desirable and revered destination — perhaps the most in Asia. Similar to Las Vegas, it is the critical mass model. Macau’s ‘cool’ factor will be unmatched in Asia.”