Looking for growth

While the Macau market still has plenty more to give, operators are starting to look elsewhere for future growth potential

Macau’s six casino operators have done well out of the market, but the prolonged slump in VIP play and an increase in alternative options for mass and premium mass players in neighboring countries is forcing many to re-think their growth strategies.

Most if not all are closely analysing opportunities in additional Asian markets, such as the Philippines, Vietnam, Laos and Japan, while others are looking further afield to Europe and the likes of Cyprus and Spain.

But operators seeking to grow their presence in Asia are struggling to identify markets that are large enough to drive growth, while Europe is already well established and the integrated resort model totally unproven.

There is more growth to be squeezed out of Macau, however, but with some operators better placed than others to benefit. Under the assumption that mass market play will continue to be the catalyst, Sands China is in the driving seat to capitalize.

“In this scenario, scale matters more than anything else and Sands China is the clear winner given its outsized share of hotel rooms, non-gaming amenities and gaming amenities,” says Grant Govertsen, managing director at Union Gaming.

“Galaxy (Entertainment) should be able to close the gap to Sands China, however, as they are the only operator with a significant amount of developable land to build on, giving them a greenfield path to growth for the next five years. No other operator enjoys this dynamic.”

There’s more to be had from VIP, too, which returned to growth in 4Q16 with Bernstein estimating it will enjoy a 7 percent uptick in GGR this year. This will benefit operators with a small/exclusive offering, and those who remained focused on VIP despite the downturn.

Vitaly Umansky, senior research analyst at Bernstein, says the “changing market dynamics” provide an opportunity for outsized success for those able to “exploit the shift by relying on product offering, customer acquisition strategy, cost control and marketing process.”

But who is most likely to extract growth from a steady rise in VIP play? Looking at recent VIP performance in Macau, Galaxy and Wynn have the most exposure on a top line basis.

“A continued differentiation on segment focus will create winners and losers in the overall Macau market,” Umansky adds.

While Macau still offers untapped potential, operators are also looking to expand their geographical reach right across Asia and further afield to ensure the long-term success of their businesses.

The unexpected downturn in VIP play and the impact it has had on Macau has been a tough but important lesson to learn for operators, who have come to realize that pegging all their hopes on one market is not a sound strategy.

But there are limited opportunities to expand elsewhere.

“There are not many good opportunities on the table that are realistic or strike the right balance between risk and reward,” says Jon Oh, managing director, head of global gaming and lodging at CLSA.

“There is nowhere large or attractive enough to make a difference. Cambodia, Vietnam, Laos; unfortunately they are too small to move the needle for the likes of Sands China and Wynn,” he adds.

Govertsen disagrees and says there is potential, but governments have failed to establish the right frameworks to make such markets attractive for Macau operators.

“Markets like Korea and Vietnam have managed to snatch defeat from the jaws of victory and not one major international operator is engaged in development in these markets that have so much potential.”

There is one market, however, that every Macau operator wants to enter –  Japan. But with just two integrated resort licenses believed to be up for grabs, competition will be fierce and most will walk away empty handed.

Those most likely to succeed in Japan are Macau operators with a proven track record and a large balance sheet that can execute on their IR plans. Oh names Sands China, Wynn, MGM, Genting and Melco as the front runners.

“There is a second tier of operators that have the potential to do well, those enthusiastic and willing but lacking the scale and scope of their rivals. For example, Galaxy has the balance sheet, experience and the need to branch out due to their sole footprint in Macau,” Oh said.

“Macau operators also face competition from the likes of Hard Rock who are interested and want to be in the market, and Caesars who have the hunger to do something. Then there is Bloomberry in the Philippines.

“Japan is still a long way from legislation being formalized and licenses granted, but when it opens up it will be the ultimate prime market and everyone will want in on the action.”

Thus far, Melco has been the most active when it comes to expanding its reach into new markets as a means of driving growth. The operator runs the City of Dreams Manila IR, while parent company Melco International is pursuing opportunities in Europe.

The Philippines is a strong market for the company, and GGR has grown consistently over the past few years even while Macau was declining. Much of this is a function of the country’s fast-growing economy, which has boosted the locals/mass segment of its business.

Bernstein remains bullish about City of Dreams Manila, in which Melco holds a majority stake, and believes it will continue to ramp up with GGR estimated to increase 12 percent CAGR from 2016 – 2019 compared to 8 percent CAGR for Macau market GGR.

Melco’s plans for Europe have the potential to be equally successful, particularly its Cyprus joint venture with Hard Rock where it has been given the green light to build an integrated resort by the local government.

There are currently no IRs in Europe, and the JV’s plans for Cyprus – which include a 500 room hotel, 1000 gaming machines and 100 tables – should help to fill that void. But Oh remains cautious about the project’s long-term success.

“The IR model can work, but key conditions need to be met. They must be clustered; there are 38 casinos in Macau giving consumers plenty of choice. There must also be a strong local market that can access the resort within two to three hours by driving.

“In addition, it must have seamless connectivity to an international airport, and be in a location with a warm climate and nice weather throughout the year. It needs to be a place where people will not hesitate to visit.   

“Cyprus and other European countries tick most of these boxes, the only one they don’t at present is the cluster of IRs which, in many ways, is the most important.”

Macau’s six main operators will undoubtedly remain focused on the market, and the individual areas they can find additional growth. But lessons have been learned, and most are now keeping one eye on opportunities elsewhere.

Some are better placed to extract growth from Macau, others in additional Asian markets and further afield. Regardless, all six will have to adapt to emerging trends and the ever-changing landscape of the industry to ensure they remain ahead of the curve.