Macau changing its game

Macau Chief Executive Fernando Chui Sai On sent a clear message to the casino industry in the first policy address of his second term in office this week -- the government is no longer just paying lip service to diversifying the economy away from gambling.
The territory, which in just over a decade has grown its industry to be more than seven times the size of Las Vegas, is currently dependent on gambling for about 85 percent of its income. However, after nine straight months of declining revenue that triggered a 17 percent contraction in Q4 gross domestic product, Chui said the industry is going through a phase of “adjustment.”
The government has cut its projected revenue from gambling receipts this year to average 20 billion patacas ($2.5 billion) a month from 27.5 billion patacas, while analysts are forecasting a second year of contraction, possibly by as much as 30 percent, according to Deutsche Bank.
In his address, Chui said the government will strengthen its oversight of the casino industry as licenses come up for renewal and may require the companies to regularly submit their investment and development plans for review, in particular with regard to non-gaming activities. 
A tourism panel, under Chui’s supervision, will draft a five-year plan for stable casino growth that will make the region less reliant on casino revenue. Macau, Chui said, will become a center of tourism and leisure travel.
“There are some major social issues, but what Chui is doing is telling the operators to make this an international place, not just for gambling -- gambling will be an amenity but not the sole purpose to go there,” said Macquarie Group analyst Chad Beynon in an interview with Bloomberg television.
The government has for some years used table caps as leverage, linking allocations to its push for more non-gaming facilities.
However, with Macau globally recognized as the world’s biggest gambling hub, change is unlikely to come quickly. According to a recent Morgan Stanley report, only about 7 percent of revenue has come from non-gaming activities over the past four years.
Las Vegas Sands unit, Sands China, is the most diversified of the six operators and also has the most hotel rooms. It accounted for half of total-non-gaming revenues generated by all of Macau’s casinos last year. Yet, non gaming was still only 15 percent of the company’s total revenue.
According to Bloomberg research, SJM Holdings and MGM China are the most reliant on income from gambling, which accounts for some 99 percent of their total revenue.
But such a change isn’t entirely without precedent. The Morgan Stanley analysts pointed to the example of Las Vegas, which has managed to swing the pendulum away from gambling to evolve into a broader destination resort with a variety of tourism and leisure activities.
In Las Vegas, the gaming /non-gaming revenue mix increased from 60 percent/ 40 percent in 1970 to 37 percent / 63 percent in 2013.
“We expect a similar transformation to Macau, although a bit slower,” the report said.
The new multi-billion mega resorts coming on line in Cotai are seen as a key step for the operators to develop their non-gaming businesses, with the number of hotel rooms set to double to about 29,000 over the next few years. 
More than 90 percent of floor space will be allocated to non-gambling activities at the six new resorts.
This year, Galaxy Entertainment will open its Galaxy Macau Phase 2 and Broadway at Galaxy Macau on May 27th, while Melco Crown Entertainment will inaugurate its $2.3 billion cinema-themed Studio City in the third quarter.
Galaxy chief marketing officer Kevin Clayton said recently that his company will follow the new rules of the game, which means shifting the priority to non-gaming businesses.
He said, 90 percent of the HK$43 billion (US$5.5 billion) investment in the Galaxy Macau phase II and Broadway is being put into non-gaming operations. The investment will double the footprint of the property to 1.1 million square meters. 
Galaxy has committed a total of HK$100 billion in investment to its Galaxy Macau resort, which after completion of phases three and four will total about 2 million square meters and will include Asia's largest JW Marriott hotel at 1,015 rooms, Ritz-Carlton's first all-suite hotel, over 120 food and beverage outlets, and a 3,000-seat theater.
The hope is that with the new amenities, visitors will stay longer and spend more. Macau visitors have on average spent 1.9 nights, but with new facilities, the company is targeting 2.5 to 3 nights. 
Melco sees its Studio City as a game changer.
"Studio City will represent the most diversified entertainment resort offering ever seen in Macau and will include Asia's highest Ferris wheel, a Warner Bros.-themed Family Entertainment Center, a fully-operational TV broadcast studio, the world's first Batman film franchise digital ride, a 5,000 seat multi-purpose live performance arena and a live magic venue, as well as approximately 1,600 hotel rooms, a vast array of food and beverage outlets and approximately 350,000 square feet of themed and innovative retail space,” Co Chairman and CEO Lawrence Ho said in the company’s annual report. 
Melco reported net revenue of $4.8 billion in 2014, but the vast majority, $4.65 billion came from gaming.
Las Vegas Sands chairman Sheldon Adelson said in a recent media interview that less than 3 percent of his company’s floor space is devoted to gaming and that going forward he doesn’t believe any resort should be permitted to allocate more than 5 percent to gaming. “Non-gaming is the future of Macau,” he said. 
It also has the potential to be a more lucrative future. Although Macau gaming in the past has been dominated by China’s high rollers glued to its baccarat tables they are, in reality, the lower-margin end of the business. After accounting for commissions to junket operators, and multiple perks such as free hotel rooms, operators only make a margin of about 10 percent to 12 percent on their VIP business, according to Bloomberg research.
That compares with about 40 percent to 50 percent for the mass market, which again pales in comparison with the 75 to 80 percent margin on hotel rooms and the 85 percent or more, the operators can earn from leasing retail space to high-end boutiques in their shopping malls. 
Sands China is expanding the retail space at its Sands Cotai Central property and will have approximately 2.7 million square feet of gross retail space once completed. The company earned over $173 million in retail space revenue from its Asian operations in Q4, up 9.1 percent, providing a powerful incentive to further expand non-gaming businesses.
However, in Macau space is at a premium, putting severe restrictions on the type and number of new attractions that can be offered. 
That’s one of the reasons the development of neighbouring Hengqin Island is seen as so important for Macau’s future, being able to offer some of the broader attractions, such as golf courses.